This article was downloaded by: [Temple University Libraries] On: 16 November 2014, At: 14:01 Publisher: Taylor & Francis Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

Journal of Legal Medicine Publication details, including instructions for authors and subscription information:

A new twist in hospital appraisal processes John D. Blum J.D.

a b


Professor of Law, Institute for Health Law , Loyola University Chicago, School of Law , One East Pearson Street, Room 512, Chicago, Illinois, 60611 b

Director, Institute for Health Law , Loyola University Chicago, School of Law , Published online: 23 Jul 2009.

To cite this article: John D. Blum J.D. (1991) A new twist in hospital appraisal processes, Journal of Legal Medicine, 12:4, 427-475, DOI: 10.1080/01947649109510864 To link to this article:

PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. Terms & Conditions of access and use can be found at terms-and-conditions

The Journal of Legal Medicine, 12:427-475 Copyright © 1991 by Hemisphere Publishing Corporation


Downloaded by [Temple University Libraries] at 14:01 16 November 2014


INTRODUCTION In the area of hospital law, no subject has received more attention than medical staff credentialing.1 There have been extensive commentaries analyzing the myriad of legal challenges brought by physicians against hospitals alleging that the individuals in question were inappropriately denied appointment or reappointment to a medical staff or had their practice privileges improperly reduced.2 Despite the attention given to this area of law, it remains one that is still fertile for continued legal analysis. Medical staff credentialing, the process of appraising physicians for initial appointment and reappointment to a medical staff and delineating the scope of practice privileges,3 is an area that is not static but has evolved in both legal and practical terms. From a legal standpoint, the body of law affecting the credentialing processes has grown as states and the Joint Commission on Accreditation of Healthcare Organizations have expanded their criteria in this area.4 Credentialing has been affected by hospital immunity provisions on both the federal and state levels as well as by chang-

* Professor of Law; Director, Institute for Health Law, Loyola University Chicago, School of Law. Address correspondence to Professor Blum at Institute for Health Law, Loyola University Chicago, School of Law, One East Pearson Street, Room 512, Chicago, Illinois 60611. 1 See Southwick, The Hospital as an Institution—Expanding Responsibilities Change Its Relationship with the Staff Physician, 9 CAL. W.L. REV. 429 (1973). See also C. HAVIGHURST, HEALTH CARE LAW AND POLICY 620-86 (1989). 2 C. HAVIGHURST, supra note 1, at 620-86. 3 Hershey, Avoiding Litigation Through Effective Credentials Review, The Hospital Medical Staff, July 1982, at 2; Williams, Medical Staff Issues—Past and Present, The Hospital Medical Staff, Jan. 1972, at 2; Williams, Basic Principles of Medical Staff Organization, in COLLECTED PAPERS OF THE UNIVERSITY OF COLORADO EIGHTH ANNUAL CONFERENCE ON HOSPITAL MEDICAL STAFF MANAGEMENT AND ORGANIZATION (1971). 4

Jost, The Joint Commission on Accreditation of Hospitals: Private Regulation of Health Care and the Public Interest, 24 B.C.L. REV. 835 (1983). See also J. HORTY, Statutory and Regulatory Criteria for Appointment, in HOSPITAL LAW 1 (1987).


Downloaded by [Temple University Libraries] at 14:01 16 November 2014



ing confidentiality protection.5 In addition, the theories upon which physicians have challenged adverse credentialing decisions continue to evolve and expand. This is particularly evident with the growth of antitrust suits and the growing flexibility of some courts to entertain these cases generally.6 In practical terms, credentialing remains volatile because the stakes for individual physicians and hospitals are very high. Clearly, medical staffing lies at the core of an acute care facility's operational viability.7 This article explores a new development in the area of medical staff credentialing—economic analysis of individual physician hospital practice—referred to as economic credentialing. The analysis presented is threefold. The first portion of the article presents a general review of the law dealing with credentialing and analyzes how extending the credentialing process to incorporate individual physician economic issues impacts on this body of law. Second, the legal status of a hospital board is explored to ascertain whether the governing entity possesses the requisite authority to expand the horizons of the credentialing process into physician economic analysis. The third part of the article contains an accounting of the results of an empirical study involving a 25-hospital survey that probed the nature of activities related to economic credentialing. In studying new trends, such as economic credentialing, it is often difficult to arrive at a succinct definition of the concept in question. Economic credentialing is particularly difficult to define because the term is used in different ways. In a broad sense, economic credentialing is used to refer to two different approaches for evaluating physicians.8 On the one hand, economic credentialing refers to a system that evaluates physicians based on explicit cost or charge parameters, and those factors become key elements in credentialing decisions. Under such a system, a physician may be required to generate a certain amount of profit for an institution, or demonstrate that he or she admits an economically favorable patient mix into the institution as a condition for retaining staff privileges. The other use of economic credentialing involves an evaluation of physicians based on individual utilization data, which serves to illustrate not only individual financial issues in a particular physician's practice, but



ILL. ANN. STAT. ch. 111 1/2, ¶ 151.2 (Smith-Hurd 1989); KY. REV. STAT. ANN. § 311.377 (Michie/ Bobbs-Merrill 1990); N.Y. EDUC. LAW § 66527(3) (McKinney 1990). Comment, The Medical Review Committee Privilege: A Jurisdictional Survey, 67 N.C.L. REV. 179, 193 (1988). See also Blumstein & Sloan, Antitrust and Hospital Peer Review, 51 LAW & CONTEMP. PROBS. 8 (1988). 7


Shortel, Morrissey, & Conrad, Economic Regulation and Hospital Behavior: The Effects on Medical Staff Organization and Hospital-Physician Relationships, 20 HEALTH SERV. RESEARCH 597 (Dec. 1985). Editors Note, 7 Hosp. L. Newsletter 1 (July 1990); Economic Credentialing is Fine—For Tightrope Walkers, 15 HOSP. PEER REV. 1 (Apr. 1990).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



quality of care issues as well. The fact of the matter is that utilization review is a well-established hospital process that is increasingly linked to credentialing review.9 Under the second general concept of economic credentialing, certain utilization factors, which have clear economic implications, are highlighted in the physician appraisal process. For example, physicians who perform excessive numbers of particular procedures or frequently order tests that have an adverse economic impact on the institution may have such behavior factored into their credentialing review. Clearly, the concept of economic credentialing that is related to utilization review is much more familiar to physicians than review based on express financial measures. While the two broad trends in economic credentialing noted are somewhat different, there is a basis of commonality in economic credentialing; namely, it is a movement oriented toward holding physicians accountable not only for their clinical performance, but also for how their practices affect the financial position of the institutions within which they hold privileges. Although economic credentialing can be applied to physician evaluation in both appointment and reappointment, it is a concept that lends itself better to the reappointment appraisal process. In order to conduct economic credentialing, there is a need for institutionspecific performance data. Information garnered from another hospital in which a physician practices, or has practiced, may be helpful in assessing the individual's financial impact on a particular institution. Economic credentialing is a timely issue as a result of a number of factors affecting acute care institutions. Hospitals now function in markets that have become highly competitive.10 Competition has resulted in business decisions that have spawned a confusing array of new inpatient and outpatient services and structural alignments. The hospital's goal is to generate broader operational bases and increase or preserve profit margins." In a tight business environment, hospital bankruptcies and closures are a reality that in the past were most unlikely.12 Linked to the increasing growth of competition in the hospital industry are dramatic changes in reimbursement. The Medicare cost-based reimbursement system has been replaced with prospective payment and comparable changes have occurred in reimbursement structures for other paying


Cantrell & Flick, Physician Efficiency and Reimbursement: A Case Study, HOSP. & HEALTH SERV. ADMIN. 43-50 (Nov./Dec. 1986). 10 Kinzer, The Decline and Fall of Deregulation, 318 NEW ENG. J. MED. 112 (1988). 11 See, e.g., Winslow, Competitive Anomaly: Consumers Pay More in 2-Hospital Towns, Wall St. J., June 6, 1990, at A1, col. 1 (details the counterproductive forces that have been unleashed in a local area hospital market). 12 Dimarco, Vazquez, & Hoffman, Turning Around Financially Distressed Hospitals, HEALTH CARE FINAN. MGMT., May

1990, at 44.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



parties including Medicaid, Blue Cross, and commercial carriers.13 In addition, hospitals in some areas have been forced by market pressures to enter into agreements with managed care plans at rates that are discounted below cost.14 The overall effect of recent acute care reimbursement changes has been to place individual hospitals in ever tightening economic positions in which profit margins have been significantly reduced or abolished. Set against the background of competition and changing reimbursement policies is an increasing awareness on the part of hospitals that it is the medical staff that accounts for the most significant portion of institutional revenues.15 There is a recognition that certain medical specialists can generate considerable profits for hospitals, and that all physicians on a medical staff can assist institutions in maximizing reimbursement through efficient delivery of medical care.16 Even with a reported surplus of physicians in certain areas of the country, there has been increased competition generally among hospitals to recruit and retain physicians whose medical specialty practices are lucrative.17 Physician recruitment and retention has become an increasingly significant activity for all acute care institutions that are concerned about having the "right" physician mix on their medical staffs.18 On the other hand, there is an increasing awareness of the negative impact that overutilization and inefficient medical management can have on hospital finances. Physicians whose hospital-based care is inefficient clearly do have a negative effect on a hospital's bottom line position.19 Added to the growing institutional awareness of the medical staff's impact on the hospital's financial position is a dramatic growth in institutional data capability that makes it possible to evaluate individual physician performances. Some of the growth in hospital data capability has been spawned by increased regulatory reporting requirements.20 In keeping with a larger national movement to assess physician clinical outcomes, there are now a myriad of computer software packages that can be used to examine



TEM (Report to Congress June 1990). 14

15 16 17

18 19 20

Kinzer, supra note 10, at 114. See also Luce & Davis, Creativity Caution Needed When Negotiating HMO Contracts, 43 HEALTH CARE FINAN. MGMT. 18, 19 (Nov. 1989); Feldman, Kralewski, Shapiro, & Chan, Contracts Between Hospitals and HMO's, 15 HEALTH MGMT. REV. 47 (1990). Shortel, Morrissey, & Conrad, supra note 7, at 600. Burda, Changing Physician Practice Patterns, Modern Healthcare, Feb. 17, 1989, at 18-26. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION, CONFERENCE ON PHYSICIAN RECRUITMENT/

PHYSICIAN-HOSPITAL BONDING (Conference Materials Oct. 9, 1987). Id. Burda, supra note 16. For example, Pennsylvania has initiated a very ambitious hospital reporting program. PA. STAT. A N N . tit. 40, § 6125 (Purdon's Supp. 1990).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



individual physician performance.21 In some instances, computer analysis can link physician clinical outcomes to either cost or charge data.22 Many institutions now have the ability to determine not only what the clinical outcome of a particular case was, but also what physician-specific costs or charges were generated in that case. In addition, computerized evaluation is such that severity of illness measures can be factored into the analysis of a particular physician's performance. While the institution ultimately must set the parameters of what is acceptable behavior, the availability of individual physician economic performance data clearly will place pressure on hospitals to incorporate such information into credentialing processes. I. CREDENTIALING REVIEWED A. Historical Perspectives Medical staff credentialing is a well-established process deeply woven into the fabric of American medicine as a long-standing hospital process.23 The early roots of credentialing predate the 20th century. In both public and private hospitals, trustees had a mandate to select physicians suitable for practice in their respective institutions.24 It was not until the 20th century, however, that credentialing became a more detailed and meaningful process. Two commentators reviewing the history of medical staff activities in American hospitals concluded that in the 19th and early 20th centuries, hospitals by and large had open medical staffs.25 The early part of the 20th century saw the development of state medical boards of licensure and improvements in medical education which, in turn, created momentum for hospital reforms.26 From 1916 to 1918 the American College of Surgeons (ACS) conducted a survey of 2,700 American hospitals that revealed numerous deficiencies.27 The survey led the college to establish a national set of standards for hospitals that included five major target areas.28 The second ACS provision stated "medical staff membership must be restricted to doctors competent in their fields and


22 23

F o r a description of one system, see Mohlanbrock, Quality and Cost Efficiency Data to Support Physician's Clinical Decisions, 5 Q R C ADVISOR 4 (Mar. 1989). See also M E D I Q U A L , C A S E STUDY 3: PROCEDURE MONITORING (1989) (a description of Medis Group II, Medi Qual Systems I n c . , Westborough, M A . ) . Mohlanbrock, supra note 2 1 , at 4 . Hershey, supra note 3 .




M . R O E M E R & J. FRIEDMAN, DOCTORS IN HOSPITALS 3 4 , 3 6 (1971).


Id. at 34-35. Id. at 35-39. Id. at 3 7 .

27 28

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



worthy in character."29 The ACS standards, together with the AMA's activities in developing standards for postgraduate medical education, were instrumental in shaping the structure of hospital medical staffs.30 In 1946, Congress enacted the Hospital Survey and Construction Act (Hill-Burton),31 which was primarily intended to subsidize hospital construction in areas with deficient bed supplies. The 1946 legislation required that states receiving Hill-Burton funds have a hospital licensure law.32 Only 10 states had licensure laws prior to the Hill-Burton Act. Accordingly, to assist states without licensure laws, the federal government developed a model licensing bill based on the ACS standards.33 Shortly after 1946, each state had its own hospital licensure law.34 Although there were certain variations in these state laws, the core provisions were similar. For example, state laws required the adoption of medical staff bylaws, physician appointment procedures, classification of staff membership, departmentalization, and periodic meetings to review clinical work.35 While the initial hospital- licensing statutes represented a significant governmental foray into controlling hospitals and developing future regulations, history of the area demonstrates that they were not stringently enforced.36 In 1952, the work of the ACS was taken over by a new voluntary entity, the Joint Commission on Accreditation of Hospitals (now JCAHO).37 Initially, the JCAHO used the same medical staff standards developed by ACS, but soon added and expanded requirements for medical staff review of physician members' clinical experiences.38 The JCAHO has played a key role in shaping hospital medical staffs and has dominated the development of physician credentialing requirements.39 It should be noted that, prior to review of state governmental and JCAHO credentialing policies, other entities, as well as the federal govern29 30 31


33 34 35

36 37 38


Id. at 3 6 . Id. at 38-39. Milligan, Provisions of Uncompensated Care in American Hospitals: The Role of the Tax Code, the Federal Courts, Catholic Health Care Facilities and Local Government in Defining the Problem of Access for the Poor, 31 CATH. L . REV. 7 , 12-13 (1987). See 4 2 U . S . C . § 291-291(1) (1991). Mulholland, The Corporate Responsibility of the Community Hospital, 17 U . T O L . L . REV. 3 4 3 , 344 (1985-86). M . ROEMER & J. FRIEDMAN, supra note 2 5 , at 22, 3 9 . Id. at 4 0 . A R K . STAT. A N N . § 17-1-02 (1989); C A L . HEALTH & SAFETY C O D E § 32128 (1990); M E . REV. STAT.

A N N . tit. 2 4 , § 2503 (1990). See also Taylor, A Comparative Study of Hospital Licensure Regulations ( U . Cal. Sch. Pub. Health, unpublished manuscript 1957). M . ROEMER & J. FRIEDMAN, supra note 2 5 , at 4 0 . Jost, supra note 4 , at 850-51. Roberts, Coale, & Redman, A History of the Joint Commission on Accreditation of Hospitals, 259 J . A . M . A . 936, 9 3 9 (1987). Jost, supra note 4 , at 872-74.



ment, developed policies dealing with credentialing.40 Most of the major medical specialty societies, as well as the AM A, have promulgated policies relative to medical staff appointment, reappointment, and privilege delineation.41 The AMA routinely reviews and revises association policies in reference to credentialing.42

Downloaded by [Temple University Libraries] at 14:01 16 November 2014

B. State Law Review of current state law demonstrates that most jurisdictions have developed some requirements for hospital medical staff credentialing. By and large, state statutes and regulations in the credentialing area are quite general, providing only a broad framework within which a hospital must develop a control system over medical staff membership. In addition to fairly routine applicant criteria, state laws generally allow flexibility to structure credentialing requirements that are reasonable and in keeping with the objectives of the institution.43 In many states the credentialing requirements under law fail to reach a level of specificity that provide hospitals with any real direction in how to structure an appointment or reappointment procedure. There are some jurisdictions, however, that have more detailed state law requirements affecting the credentialing process. For example, under Maryland law there is a general requirement that licensed hospitals establish a credentialing process that documents a physician's education, clinical expertise, licensure history, medical history, claims history, and professional experience.44 In addition, Maryland law requires a probationary period for initial appointments and a reappointment process every two years.45 Maryland mandates that, in the context of medical staff reappointments, several factors be considered, including a physician's pattern of performance, utilization, quality, and risk data, as well as a review of clinical skills.46 C. Joint Commission on Accreditation of Healthcare Organizations The standards of the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) subscribed to by hospitals provide a 40



Conditions of Participation (Nov. 1989).

44 45 46

4 Medicare & Medicaid Guide (CCH) § 2 2 , pt. 482


Medical Specialties 1986). A M A House Delegates, Recredentialing of Physicians, N o . 2 0 1 , 1988 A M A HOUSE DELEGATES PROCEEDINGS 137, 4 1 5 ; AMA House Delegates, Credentialing, Allied Health Professionals, N o . 203,


for Hospitals,

1988 A M A H O U S E OF DELEGATES PROCEEDINGS 137, 4 1 6 (1988).

See ILL. STAT. A N N . ch. 111 1/2, ¶ 142-57 (Smith-Hurd 1989). M D . H E A L T H - G E N . C O D E A N N . § 19-319(e)(l) & (2)(i) (1990). Id. § 19-319(e)(2)(ii) & (iii). Id. § 19-319(e)(2)(iii).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



much more detailed set of directives about how credentialing processes are to be conducted.47 While JCAHO standards are those of a voluntary organization, they do have the force of law in as much as arguments have been successfully advanced that the standards constitute contractually binding criteria.48 In addition, JCAHO standards are often used as evidence to establish a basis for judging hospital conduct.49 And clearly, JCAHO requirements have had a great impact on the government regulatory processes affecting hospitals.50 In reference to credentialing, three sections of JCAHO accreditation standards need to be considered—those dealing with the governing body, the medical staff, and quality assurance.51 Although credentialing, according to the JCAHO, is ultimately the legal responsibility of the governing body, it is an activity that the board shares with the medical staff.52 The system outlined is one of delegation in which the actual credentialing decisionmaking functions are carried out by the medical staff with the board's role being that of an overseer of the process. The medical staff is charged with making the recommendations to the trustees concerning appointments, reappointments, terminations, and granting or revising clinical privileges.53 Although the JCAHO credentialing criteria is fairly detailed, the Joint Commission does not preclude the possibility that a hospital can require additional criteria, provided it is related to hospital goals. Under the JCAHO requirements, it is necessary for medical staffs to have a detailed set of bylaws that establish the ground rules for self governance and cover all facets of a medical staffs operations, including credentialing.54 Within the medical staff bylaws, JCAHO requires that hospitals have specific appointment processes in place.55 Medical staffs are mandated by JCAHO to delineate hospital specific privileges for each staff member.56 Just as in the case of appointment criteria, JCAHO allows hospitals flexibility in deciding how, and what, clinical privileges are extended to a particular physician.57 The guidelines require that each clinical department 47



Jost, supra note 4, at 842-45. 49 See Lucas v. Hospital Auth. of Dougherty County, 193 Ga. App. 595, 388 S.E.2d 871, 873 (1989); Andrews v. Northwestern Memorial Hosp., 184 Ill. App. 3d 486, 540 N.E.2d 447 (1989). 50 Jost, supra note 4 , at 843, 870. 51 JCAHO, supra note 4 7 . 52 Id. at Medical Staff ¶¶ & 53 Id. ¶ 54 Id. ¶ 2. 55 Id. ¶¶ 56 Id. ¶ 4 . 1 . 1 . 57 Id. ¶¶

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



develop its own criteria for delineation of privileges and suggest that, in addition to an individual's record, board certification serve as a benchmark. Although the guidelines on privilege focus primarily on clinical qualifications, they do allow for other factors to be considered, such as geographic location of the applicant, liability insurance coverage, availability of necessary institutional resources, and the like.59 Under JCAHO requirements, physicians must have their appointments and clinical privileges evaluated every two years through a formal appointment process conducted by the medical staff.60 Reappointment requires appraisal of an individual's professional performance, judgment, and clinical skills, and other indicators of continuing qualifications.61 The appraisal is heavily dependent on information generated from ongoing medical staff and departmental peer review activities, such as general monitoring and evaluation of the quality and appropriateness of care, or more specific reviews of discrete areas such as blood and drug usage review.62 The Joint Commission recommends reappraisal reviews that focus on factors such as the number of procedures performed, major diagnoses made, and rates of complications, but as in other credentialing areas, it does not set rigid limitations on what is reviewed. Based on JCAHO commentary, one could argue that, in the context of reappointment, any areas that are subject to physician peer review legitimately can be considered in the reappraisal process.63 Requirements for quality assurance programs are extensively detailed in the JCAHO accreditation manual.64 Quality assurance reviews are directly related to credentialing, for such reviews must be considered as part of the reappointment process.65 Specifically, it is required that the results of evaluations concerning quality and appropriateness of patient care, clinical performance, infection control, utilization review, and incident reports be considered in reappointments.66 Taken together, the general framework of state law, and the extensive requirements of JCAHO represent the most complete picture of the hospital duty in credentialing. It is clear that the regulatory mandate leaves considerable leverage for institutions to structure credentialing in ways that are suited to institutional needs and allow for the adoption of criteria be58

Id. ¶¶ Id. ¶¶ 60 Id. ¶ 5.2. 61 Id. ¶¶ 5.3.- 62 Id. ¶¶ 6.1.1.-; 6.1.3.-; 6.1.5.-6.15.5. 63 10 Joint Commission Perspectives, Nov./Dec. 1990, at 15. 64 JCAHO, supra note 47, Standards for Quality Assurance. 65 Id. at Quality Assurance ¶¶ 2.5-2.5.3. 66 Id. ¶¶ 2.3-2.3.3 & 2.4. 59

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



yond those articulated. These regulatory requirements are given institutional life through a hospital's corporate and medical staff bylaws in which the specific details of credentialing are most clearly articulated, and as such, become a vital frame of reference in deciphering this process on an individual hospital basis. Both state law67 and JCAHO accreditation standards require the creation of hospital corporate and medical staff bylaws. As in other areas of hospital regulation, the mandate to have bylaws in place is one that provides institutions with considerable flexibility in developing specific content. Beyond regulatory requirements, hospitals are free to develop bylaws as they wish, provided that the policies adopted are in line with legitimate institutional objectives. D. Judicial Viewpoints In addressing questions about the legal status of bylaws, the courts generally have ruled that bylaws constitute binding contracts between medical staff members and hospitals, the terms of which must be observed.68 Going against the trend of recent case law is Gianetti v. Norwalk Hospital,69 in which the Connecticut Supreme Court adopted a position that hospital bylaws per se do not constitute a contract with medical staff members. Interestingly, the Connecticut court ruled that the granting of privileges to a physician pursuant to terms that require the individual to abide by medical staff bylaws constitutes a contractual relationship.70 According to the court, the hospital's bylaws are an essential element in determining the nature of the agreement with a staff physician and are binding on the institution, constituting an enforceable part of the physician-hospital relationship.71 Some courts have expressed the opinion that bylaws are enforceable not only on a contractual basis but as a matter of public policy. For example, in the case of Balkissoon v. Capitol Hill Hospital,12 the District of Columbia Court of Appeals reasoned that the public's interest in the effective operation of hospitals created an obligation upon the institution to adhere to its own bylaws. The Balkissoon court, in a medical staff dispute case, believed that the public had an interest in seeing that hospitals follow their bylaws and do not act in an arbitrary fashion.73 67

See, e.g., C O N N . AGENCIES R E G S . § 19-13-D3(b)(1)(A) (1979).


See, e.g., Bhatnagar v . Mid-Maine Med. Center, 5 1 0 A . 2 d 233 (Me. 1986); Dworkin v. St. Francis Hosp., Inc., 517 A.2d 302 (Del. Super. Ct. 1986); Miller v. Indiana Hosp., 277 Pa. Super. 370, 419 A.2d 1191 (1980); Spencer v. Community Hosp. of Evanston, 87 Ill. App. 3d 214, 408 N . E . 2 d 981 (1980); Dimond v. Samaritan Health Serv., 27 Ariz. App. 682, 558 P.2d 710 (1976). 211 Conn. 5 1 , 5 9 , 557 A.2d 1249, 1253 (1989). Id. at 1255. Id. 558 A.2d 304 ( D . C . App. 1989). Id. at 308.

69 70 71 72 73


Downloaded by [Temple University Libraries] at 14:01 16 November 2014

1. Challenges in the Appointment/Reappointment



Perhaps the most significant body of law illustrating the parameters of medical staff credentialing is found in the extensive number of cases dealing with virtually all aspects of appointment and reappointment. For purposes of analysis, cases involving credentialing can be broken down into three broad categories: (1) cases that mandate and explore the nature of the hospital credentialing duty; (2) cases that attempt to clarify the necessary procedures hospitals must follow; and, (3) cases that evaluate the appropriateness of specific criteria used for credentialing decisions. There have been extensive legal commentaries on this body of common law with particular attention focusing on the evolution of theories used by physician plaintiffs to obtain judicial review in challenges against private hospitals.74 Before the watershed ruling of Darling v. Charleston Community Hospital,15 it was a well-established common-law principle that hospitals had a legal duty to appoint qualified physicians to their medical staffs.76 Although the original duty of the hospital in the appointment/ reappointment area was limited, it was nevertheless a responsibility that was recognized by the courts in the early part of this century.77 The landmark hospital law case of Johnson v. Misericordia Community Hospital™ concerned a patient who brought a suit against a hospital based on the theory that the institution was negligent in appointing a particular physician to its medical staff, and in granting that physician orthopedic surgical privileges. In reviewing an extensive body of hospital case law in the corporate negligence area, the Supreme Court of Wisconsin concluded that "a hospital has a direct and independent responsibility to its patients . . . to insure that its medical staff is qualified for the privileges granted and/or to evaluate the care provided."79 The court ruled that credentialing, while a delegated responsibility of the medical staff, was a corporate responsibility of the hospital.80 More recently, the Supreme Court of Florida, in the case of Insinga v. LaBella,^ found that a hospital has an independent legal duty to its patients to ensure the competence of its physicians and personnel through its selection and review processes. While the Florida court was influenced by state law, the ruling in Insinga was based on other state court precedent and on a public policy recognition that quality control demands that the hospital 74 75

Southwick, supra note 1, at 454-58. 33 Ill. 2d 326, 211 N.E.2d 253 (1965), cert, denied, 383 U . S . 9 4 6 (1966).


E. HAYT, L . HAYT, & A . GROESCHEL, supra note 2 4 , at 133.


Id. 99 Wis. 2d 708, 301 N.W.2d 156 (1981). Id. at 165. Id. at 174. 543 So. 2d 209, 214 (Fla. 1989).

78 79 80 81

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



supervise and monitor the work of its medical staff.82 Although not all states have had rulings that hold hospitals corporately liable in the credentialing area, the trend in such direction is strong, and sufficient to lead one to conclude that effective medical staff appoihtment/reappointment processes are legally required under common law. Indeed, there are no recent cases that would lead one to conclude the opposite. Although hospitals have a broad mandate to engage in credentialing activities, the process is not without legal constraints. As discussed, hospitals must follow the dictates of state law, JCAHO accreditation standards, and their own bylaws. Physician challenges against institutional denials of privileges stand out as one of the most frequently encountered legal actions in the hospital law field.83 There are an extensive number of cases that demonstrate several legal theories used by physicians to overturn negative credentialing decisions. For physicians denied medical staff privileges the stakes are high and, as a result, legal theories underpinning credentialing challenges continue to evolve despite judicial resistance to such claims, particularly in the context of private hospitals. Among the theories used by physician plaintiffs in medical staff disputes, breach of bylaws has been recognized most widely as a claim that will result in overturning a hospital medical staff decision. For example, in the Illinois Supreme Court case of Barrows v. Northwestern Memorial,M the state supreme court rejected more recent theories that allow for judicial review of medical staff disputes. Judicial review of private hospital decisions has been allowed in a small number of states. As noted in Barrows, judicial review has been based on a concept of the hospital as a quasipublic institution or under application of the fairness doctrine, which does not require a showing of state action, as is the case in more traditional due process challenges. The court adopted the position that Illinois courts would entertain physician credentialing challenges against private hospitals only in situations where it could be demonstrated that the institution violated its bylaws.85 In the Tennessee case of Alfredson v. Lewisburg Community Hospital,*6 the court was confronted with a very current dilemma of deciphering the impact of termination of the individual's exclusive medical service con82

Id. Trail & Kelly-Claybrook, Hospital Liability and the Staff Privilege Dilemma, 37 BAYLOR L. REV. 315, 337 (1985). 84 123 Ill. 2d 49, 525 N.E.2d 50 (1988). 85 For an explanation of doctrine in this area, see id. 86 N o . 88-31 l-II (Tenn. App. Nov. 8, 1989) (LEXIS, states library, Tenn. file), rev'd in part on other grounds, Lewisburg Comm. Hosp., Inc. & Republic Health Corp. v. Alfredson, 805 S.W.2d 756 (Tenn. 1991). The case is unusual in that medical staff privileges are generally tied to continuation of exclusive contracts. 83



Downloaded by [Temple University Libraries] at 14:01 16 November 2014

tract with the hospital on the physician's medical staff privileges. A Tennessee appellate court, and later the state supreme court, ruled that, even with medical staff termination provisions in an exclusive contract, the hospital's medical staff bylaws had to be followed.87 The appellate court indicated: The regulatory obligation to adopt medical staff bylaws that include a fair hearing procedure necessarily imposes a legal duty upon the hospital to follow its own bylaws. To suggest otherwise would be to "reduce the bylaws to meaningless mouthing of words. . . ." [W]e align ourselves with the courts holding that a hospital's bylaws are an integral part of its contractual relationship with the members of its medical staff.88

At one time, the most frequently maintained challenges brought by physicians against hospitals were those alleging that, in denying medical staff privileges, the individual's due process rights were violated.89 Due process challenges in public hospitals can proceed routinely on the merits of the particular claim when there is no question that the institution must follow the constitutional dictates of due process and equal protection.90 In the case of Sosa v. Board of Managers of Val Verde Memorial Hospital,9X a public facility, the plaintiff physician challenged a denial of hospital privileges. The court stated that "procedural due process must be afforded the applicant so that he may explain or show to be untrue those matters which might lead the board to reject his application."92 When the due process challenge is raised against a private hospital, lack of state action poses a serious barrier. There have been numerous attempts to circumvent state action barriers, but by and large these attempts have not been successful. In a handful of jurisdictions the courts have allowed review of challenges against private hospitals, circumventing state action by use of alternative theories, most recently through application of antitrust law.93 In New Jersey, starting with the case of Greisman v. Newcomb Hospital,94 the courts have treated hospitals as quasi-public entities and have mandated that they be accountable for their treatment of medical staff 87 88


90 91 92 93 94

Alfredson, No. 88-311-II (Tenn. App. Nov. 8, 1989), 805 S.W.2d 756 (Tenn. 1991). Id. (citations omitted) (quoting Chalasani v. Neuman, 97 A.D.2d 806, 468 N.Y.S.2d 672, 673 (1983)). Clark, Ties that May Bind: Antitrust Liability for Exclusive Hospital Physician Contracts after Jefferson Parish Hospital District v. Hyde, 54 Miss. L.J. 1, 3 (1984). See also Comment, Hospital Medical Staff Privileges: Recent Developments in Procedural Due Process Requirements, 12 W I L LAMETTE L. REV. 137 (1975). C. HAVIGHURST, supra, note 1, at 622-25. 437 F.2d 173 (5th Cir. 1971). Id. at 177. C . HAVIGHURST, supra note 1, at 631-40. 40 N . J . 389, 192 A.2d 817 (1963).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



members. A number of other states, including Alaska, Vermont, and Colorado have adopted positions similar to New Jersey, allowing for review of medical staff decisions.95 In California, courts review medical staff disputes on the basis of applicable common law, which requires that institutions treat physicians fairly and apply concepts akin to procedural due process.96 The so-called "fairness doctrine" has resulted in credentialing disputes being more routinely litigated in the California courts than is the case in other states.97 While the challenges alleging procedural impropriety have been difficult to successfully pursue, physician actions alleging unfair treatment based on discrimination have been more readily accepted by the courts.98 There is a body of case law clearly indicating that hospitals cannot discriminate against physician applicants or staff members on the basis of sex, religion, or national origin.99 Physicians alleging racial discrimination have brought successful challenges against hospitals based on 14th amendment equal protection arguments100 and Title VII of the Civil Rights Act.'01 From the large body of case law that deals with various nuances of the credentialing process, it appears that hospital defendants fare quite well. In fact, provided that institutions follow their bylaws, afford physicians due process, and do not engage in discriminatory or anticompetitive behavior, they have a considerable degree of flexibility in how they exercise the credentialing function. An additional factor is that physicians on credentialing committees, as a result of liability and antitrust concerns surrounding peer review, can avail themselves of personal protections pursuant to state and federal immunity provisions.102 For purposes of this article, the subset of medical staff challenges particularly relevant to economic credentialing are those cases in which physicians have challenged specific criteria that resulted in denial or reduction of privileges. Generally, physician medical staff appointment and reappointment are based on criteria concerning training, practice experience, and quality of care.103 There are, however, other parameters that may be


See, e.g., Woodard v. Porter H o s p . , 125 V t . 4 1 9 , 2 1 7 A.2d 3 7 (1966). C . HAVIGHURST, supra note 1, at 638-39. See also M c M a h a n , Judicial Review of Internal Policy Decisions of Private Nonprofit Hospitals: A Common Law Approach, 3 A M . J . L . & M E D . 149 (1977). 97 C . HAVIGHURST, supra note 1, at 638-39; M c M a h a n , supra note 9 6 . 98 J. HORTY, supra note 4 , at chs. 1-3. 99 Id. 100 Id. 101 Id. 102 I L L . A N N . STAT. c h . 111 1/2, ¶ 151.2 (Smith-Hurd 1989); K Y . REV. STAT. A N N . § 311.377 (Michie Bobbs-Merrill 1990); N.Y. E D U C . LAW § 66527(3) (McKinney 1990). 96


S. K E R N A G H A N , M E D I C A L STAFF BYLAWS H A N D B O O K c h . 4 (1987).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



considered in credentialing, and the question arises as to how much leeway courts have given hospitals in adopting appraisal standards. In reviewing medical staff bylaws, it is clear that institutions consider a range of factors in appointment and reappointment. For example, in the initial appointment process, it is common to require a physician's medical malpractice history, evidence of malpractice coverage, statement of mental and physical condition, and references concerning character, ethics, and ability to work with others.104 In reappraisals, medical staff bylaws often require consideration of CME participation, maintenance of timely, accurate, and complete medical records, attendance at required meetings, service on staff and hospital committees, and the like.105 While some of the factors listed may impact quality of care, they are not all tightly linked to the issue of whether a particular physician is clinically competent. Case law generally supports the adoption of a wide range of standards for judging physicians. In a case previously noted, Sosa v. Board of Managers ofVal Verde Memorial Hospital,™ the court, in deciphering the scope of board authority in credentialing, supported the adoption of standards that are reasonably related to the hospital's operations. The Sosa court indicated that hospitals have broad leeway in developing credentialing criteria and that, in certain areas, a hospital did not have to develop precise standards, such as the requirement that a physician exhibit personal fitness to practice medicine.107 The only limit Sosa placed on evaluation criteria was that the criteria be related to hospital operations, and not be arbitrary or capricious.108 The Supreme Court of New Jersey, in Garrow v. Elizabeth General Hospital and Dispensary,™ held that, in evaluating physicians, a hospital board should be guided by a sense of what is reasonable in relation to the interests of the public, the physician in question, and the institution. According to Garrow, hospital credentialing standards can be overturned if they are arbitrary or capricious, but outside of that, the institutional leeway in making such decisions is broad.110 In the case law, there are a number of situations in which physicians have brought challenges against institutions for actions taken against them based on violations of arguably narrow bylaw requirements. For example,



(1985). Id. 106 Sosa, 4 3 7 F.2d at 1 7 3 . 107 Id. at 176. 108 Id. at 177. 109 79 N.J. 549, 401 A.2d 533 (1979). 110 Garrow, 401 A.2d at 541. 105

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



in the New York case of Jones v. Yonkers General Hospital, Inc.,m the plaintiffs medical privileges were suspended for failure to keep complete medical records and to maintain malpractice insurance coverage, as required by the hospital bylaws. The hospital, in suspending the plaintiffs privileges, demonstrated that it had followed its bylaw procedures and the court held that the hospital's actions were in compliance with New York law." 2 In the Georgia case of Dunbar v. Hospital Authority of Gevinnett County,m the court held that denying an applicant staff privileges for not providing full disclosure of information about his licensure was reasonable and supported by adequate evidence. Similarly, a Michigan court in the case of Chapman v. Peoples Community Hospital Authority,114 ruled that a hospital executive committee acted properly when it suspended a staff physician's privileges for refusal to pay a $100 library assessment. The Michigan court found that the library assessment was appropriate, the physician was afforded due process, and the executive committee acted within its rights as contained in the hospital bylaws."5 A more difficult type of case involves challenges to bylaw provisions that require physicians to demonstrate their ability to work with others as a requirement for appointment or reappointment. A number of courts have upheld credentialing actions taken against physicians based on their inability to work with others."6 For example, in the California case of Pick v. Santa Ana-Tustin Community Hospital,1" the court ruled that denial of psychiatric privileges was justified based on evidence that the plaintiffs lack of ability to work with others posed a real and substantial danger to the quality of medical care. In Ritter v. Board of Commissioners Adams County Public Hospital,m a Washington state court ruled that the hospital in question had not acted arbitrarily or capriciously in continuing the summary suspension of a physician on charges that he improperly altered hospital records. The court agreed with the hospital's conclusion that the physician's noncooperation in recordkeeping was a violation of the institutional bylaw requirement of ability to cooperate and work with others."9 While it is apparent from review of the case law that hospitals have 111

143 A.D.2d 885, 533 N.Y.S.2d 522 (1988). Id. at 524. 113 182 S.E.2d 89 (Ga. 1971). 114 362 N.W.2d 755 (Mich. App. 1984). 115 Id. 116 J. HORTY, supra note 4, at Part B. 117 130 Cal. App. 3d 970, 182 Cal. Rptr. 85 (1982). 118 637 P.2d 940 (Wash. 1981). 119 Id. at 948. 112

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



significant leeway in adopting evaluation criteria, such leeway is not unlimited. For instance, in the California case of Miller v. Eisenhower Medical Center,120 a state appellate court held that a bylaw provision requiring that physicians be able to document their ability to work with others was too vague and ambiguous for uniform, non-arbitrary application. An Indiana court in Porter Memorial Hospital v. Harvey'21 took the position that a public hospital had wide discretion in credentialing, but that such discretion was limited by the hospital manager's fiduciary responsibilities to act in the public interest. The court expressed the view that adoption of unreasonable, vague, or arbitrary rules by a government sponsored hospital would constitute a violation of the institution's responsibility to the public.122 In the cases noted, and others in the area, it becomes clear that the point of vulnerability for credentialing criteria arises when a particular standard does not exhibit a nexus to some legitimate aspect of hospital operations, and tends to be vague and overly general. 2. Touching on Economic Credentialing In moving toward physician evaluation criteria that are economically focused, two related areas can be identified—exclusive physician contracting and attempts to create closed medical staffs or departments. It is clear that the motivation for exclusive contracts and closed staffs/departments is strongly linked to ensuring quality medical care, but, there are very real economic factors at work here as well. Institutions often enter into exclusive contracts or closed departments or staffs for business reasons. Considerations of profit, managerial efficiency, and physical capacity are frequent reasons utilized by hospitals for limiting membership on their medical staffs.123 In recent years, exclusive contracts for the provision of hospital physician services have continued to increase in popularity, particularly in areas of hospital-based specialties such as radiology, anesthesiology, and emergency medicine.124 A physician denied medical staff privileges as a result of a closed staff-department policy or an exclusive contract may turn to the courts for redress. Similarly, when a physician loses privileges as a result of a hospital entering into an exclusive agreement, a lawsuit may ensue.125 120

9 7 Cal. A p p . 3d 193, 158 Cal. Rptr. 614 (1979). 151 Ind. App. 2 9 9 , 279 N.E.2d 583 (1972). 122 Id. at 590. 123 Hall, Institutional Control of Physician Behavior: Legal Barriers to Healthcare Cost Containment, 137 U . P A . L. REV. 4 3 1 , 5 0 8 (1988). This article is the first in the legal literature to deal explicitly with the concept of economic credentialing. 124 Clark, supra note 8 9 , at 2 . 125 Id. at 3 . 121

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



In the New Jersey case of Belmar v. Cipolla,m a group of anesthesiologists brought suit alleging that an exclusive contract for anesthesiological services between another physician group and a community hospital violated public policy and antitrust law. The Belmar court, like other New Jersey courts, accepted the notion that hospitals are institutions that operate primarily to serve the public, and as such, those running the hospital are bound to make reasonable decisions consistent with the public's interest.127 According to Belmar, in the area of credentialing, hospitals cannot arbitrarily exclude physicians, but New Jersey law, both common and statutory, allows hospital management to balance the interests of individual physicians against the impact additional medical staff would have on hospital operations and ultimately on the quality of care.128 The court concluded that the legality of exclusive contracts may be debatable, but in the case at hand it was a reasonable choice that did not violate public policy.129 Although Belmar identified quality of care as the ultimate objective that made the exclusive agreement in question legally appropriate, it seems reasonable, from the language of the case, to conclude that other objectives, such as economic efficiency, would be acceptable.130 In reference to the antitrust claim in Belmar, the plaintiff alleged that the exclusive contract was an illegal tying arrangement that constituted a per se violation of New Jersey antitrust law.131 The court did not believe that the record contained enough information about market share and alternative methods of providing anesthesiology to allow for the antitrust challenge.132 In its analysis, the New Jersey court relied heavily on the more factually complex Supreme Court case of Jefferson Parish Hospital District No. 2 v. Hyde,m which applied the rule of reason test in an exclusive contract situation. Justice O'Connor argued that a tie-in arrangement was reasonable in that it resulted in 24-hour coverage and more efficiency in hospital administration.134 The New Jersey court in Belmar held that, in evaluating an exclusive contract situation, a rule of reason analysis was particularly appropriate because such situations were both novel and complex, thus warranting careful judicial review as to their legitimacy.135 In the Maryland case of Anne Arundel General Hospital, Inc. v.


96 N . J . 199, 4 7 5 A . 2 d 533 (1984). Id. at 538. 128 Id. 129 Id. at 539-40. 130 Id. at 538. 131 Id. at 540. 132 Id. at 543. 133 466 U . S . 2 (1984). 134 Id. at 43-44 (O'Connor, J., concurring). 135 Belmar, 4 7 5 A.2d at 544. 127

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



O'Brien,m a group of radiologists brought suit against a hospital alleging in part breach of contract and violation of due process as a result of termination of their medical staff privileges. The physician plaintiffs contended that they should not have lost their hospital privileges when their exclusive radiology contract expired.137 The plaintiffs did not challenge the right of the institution to enter into an exclusive contract but conceded the hospital's right to do so. The Maryland court found that the exclusive contract was drafted in such a way that continuation of hospital privileges was in fact conditional, based on the renewal of the agreement.138 In the previously noted Tennessee case of Alfredson v. Lewisburg Community Hospital,139 the Tennessee Supreme Court reached the opposite result from O'Brien, ruling that termination of an exclusive contract for radiological services did not result in automatic loss of medical staff privileges. The contract in Alfredson did not link medical staff privileges to its continued existence as did the scenario in O 'Brien. Also noteworthy in the Alfredson case is the Tennessee Appellate Court's recognition of the legitimacy of the decision to enter into an exclusive contract for radiological services that was based on the hospital administration's medical and business considerations.140 Exclusive contractual arrangements between hospitals and physicians undoubtedly will be the subject of judicial challenges for some time to come. From the cases that exist, one can conclude that exclusive contracts could lead to possible legal problems if they are not supported by sound medical and financial reasoning. It is thus clear that the courts have not rejected the notion of an exclusive contract on its face as legally inappropriate, but on the contrary, have accepted exclusive contracts as a justifiable part of hospital operations.141 Similar to questions arising with respect to exclusive contractual arrangements are the questions that have been spawned by the movement of medical staffs toward a closed staff or closed departmental arrangement.142 Just as exclusive contracts are in part motivated by economics, so too are the decisions to close medical staff membership.143 A decision to close a 136

4 9 M d . A p p . 362, 4 3 2 A.2d 483 (1981). Id. at 4 8 5 . 138 Id. at 4 8 8 . 139 N o . 88-311-II (Tenn. A p p . Nov. 8, 1989) (LEXIS, state library, Tenn. file). 140 Id. 141 Belmar, 475 A.2d at 536. See also Radiology Prof. Corp. v. Trinidad Area Health Assoc. I n c . , 195 Colo. 2 5 3 , 5 7 7 P.2d 7 4 8 (1984) (upholding validity of exclusive contracts); Blank v. Palo AltoStanford H o s p . , 234 Cal. A p p . 2 d 377, 4 4 Cal. Rptr. 572 (1965) (exclusive contract is a reasonable and proper method of operating an x-ray department). 142 Classen, Jefferson Parish and Its Progeny: More Efficient Healthcare at What Price?, 7 5 K Y . L . J . 441, 464 (1986). 143 Id. 137



medical staff that is not supported by an adequate rationale could be viewed as suspect and subject to a legal challenge. But if the reasoning for a closed medical staff or department is justifiable from a quality, efficiency, or cost basis, as with exclusive contracts, the courts likely will uphold such

Downloaded by [Temple University Libraries] at 14:01 16 November 2014


arrangements. In Lewin v. St. Joseph's Hospital of Orange,m the physician plaintiff brought a suit against the hospital challenging the institution's closed staff policy in its chronic renal hemodialysis unit. The California court ruled that the hospital board's decision to adopt a closed medical staff was not arbitrary or capricious, but rather was based on sufficient evidence.146 The court concluded that the evidence presented in support of the closed staff decision was adequate to build a case to justify the hospital policy.147 Of particular interest was the credence given the economic rationale the defendant hospital presented for adopting a closed staff program. The court was swayed by the hospital's argument that the closed staff policy would result in patient cost savings.148 The Supreme Court of New Jersey also dealt with a physician challenge to a hospital's closed staff policy in Desai v. St. Barnabas Medical Center.m There, a physician sued to compel the hospital to admit him to its regular medical staff.150 The physician, as in the Lewin case, alleged that the St. Barnabas closed staff policy was illegal in that it was arbitrary and capricious.131 The New Jersey court agreed with the physician's claim because the closed staff policy was not absolute. Rather, it was subject to an unacceptable exception—that applicants who were associated with physicians on the staff could gain admission.152 The state supreme court indicated, however, that if a closed staff policy was rational it would be viewed as a legitimate exercise of the institution's duty as a public fiduciary.153 The court found that the hospital's public duty stems from policy considerations that have both statutory and common-law roots.154 In probing the public fiduciary status of the hospital, the Desai court quoted New Jersey law, which articulates a state public policy that hospital care be


Closed Medical Staffs, 38 TRUSTEE 58 (Sept. 1985); See also Bartels & O'Donnell, Quality Criteria for Medical Staff Admission: A Beginning, 34 HOSP. & HEALTH SERV. ADMIN. 269 (Summer 1989). 145 82 Cal. App. 3d 368, 146 Cal. Rptr. 892 (1978). 146 Id. at 905. 147 Id. at 906. 148 Id. at 908. 149 103 N.J. 79, 510 A.2d 662 (1986). 150 Id. at 664. 151 Id. 152 Id. at 671. 153 Id. 154 Id. at 665-68.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



"efficiently provided and properly utilized at a reasonable cost."155 The New Jersey court adopted the position that hospital discretion in creating policies such as closed medical staffs or departments is broad, provided the discretion is exercised in the public interest within the institution's fiduciary mandate.156 If it can be shown that a particular policy does not further legitimate health care objectives, then the policy may be challenged as discriminatory, and thus held invalid.157 Redding v. St. Francis Medical Center15* presents a California case in which two surgeons, who had been long-standing active members of the medical staff of St. Francis, sued the hospital when their privileges to perform cardiac bypass surgery were terminated. The hospital's withdrawal of cardiac surgical privileges was based on its decision that, for quality and operational efficiency, it was better to have a closed rather than an open staff system in the cardiac surgical area.159 In challenging the closed cardiac surgical policy, the plaintiffs alleged breach of contract, breach of a covenant of good faith and fair dealing, negligence, negligent interference with prospective economic advantage, interference with present and prospective contractual rights, and unfair competition.160 The appellate court based its decision on case law that permits hospitals to enter into exclusive contracts provided, as indicated in other cases, that adequate justification for the institution's actions can be found.161 The plaintiffs argued that their situation differed from past cases in that both physicians already had medical privileges for some time, and as such, had a vested property right in staff membership.162 The court rejected these arguments holding that legitimate hospital managerial considerations must outweigh vested interests of physicians even if staff members individually suffer adverse economic consequences.163 The decision in Redding is important because the rationale used to justify the hospital's course of action provides support for establishment of a medical staff development plan that would clearly focus on economic factors in physician staffing, and could move the facility toward exclusive contract situations or closed departments.

155 156 157



Id. at 6 6 6 (quoting N . J . STAT. A N N . § 2 6 : 2H-1 (West 1987)). Id. at 668. In Desai, the exception to the closed staff policy w a s held to be irrational in that the overall policy was geared toward reducing the pressure on institutional resources and the exception allowing affiliated physicians n e w privileges clearly worked against the broader policy objective. 2 0 8 Cal. App. 3d 9 8 , 2 5 5 Cal. Rptr. 806 (1989).

Id. at 808. Id. at 807. 161 Id. at 810-11. 162 Id. at 810. 163 Id. at 811. 160



Downloaded by [Temple University Libraries] at 14:01 16 November 2014

3. Economic Credentialing Cases In going beyond exclusive contracting and closed staff decisions, the next line of inquiry deals directly with whether the courts have specifically considered economic credentialing decisions. The question becomes whether there are cases in which physicians have challenged the legality of credentialing decisions based specifically on the use of economic criteria. At this point, a review of the case law reveals only a small number of reported actions that could be classified as involving challenges to economic credentialing either via the application of utilization standards or more explicit economic measures. The issue of identifying economic credentialing litigation is complicated by the fact that in certain credentialing challenge cases, quality and cost issues are inextricably linked together. An example of the cost quality linkage can be seen in the Illinois case of Knapp v. Palos Community Hospital.m There, a group of physicians brought a legal action challenging the curtailment of their medical staff privileges on seven different grounds.165 The basis for the hospital's action against the plaintiffs stemmed from quality assurance reviews that showed that this group of physicians had a serious overutilization problem.166 Quality monitoring uncovered inappropriate use of lung scans and medications, excessive use of diagnostic tests, pacemakers, and pulmonary angiograms, unsubstantiated diagnoses, and improper testing and treatment.167 The evidence developed by the hospital clearly indicated major quality problems, but there was another factor. The institution had determined that the plaintiff physician's costs were 31 % higher than those of other staff members.168 The excessive costs were viewed as being symptomatic of quality problems and clearly became a major factor in curtailment of hospital privileges.169 In the somewhat similar case of Rao v. St. Elizabeth's Hospital,"0 a physician challenged his dismissal from the hospital medical staff. A summary suspension initiated by the hospital's chairman of medicine was based on extensive reviews of the plaintiffs hospital charts, which demonstrated utilization problems.171 The court was presented with evidence of a pattern of inappropriate and excess utilization of laboratory procedures, particularly EKGs and glucose tolerance tests. There was nothing in the court's opinion suggesting a cost issue per se, but clearly the fact that most overutilization of tests or procedures results in excessive costs or charges is 164

125 Ill. App. 3d 244, 465 N.E.2d 554 (1984). Id. at 564. 166 Id. at 5 5 7 . 167 Id. at 560. 168 Id. 169 Id. at 5 6 1 . 170 140 Ill. App. 3d 442, 4 8 8 N.E.2d 685 (1986). 171 Id. at 687. 165

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



well established.172 Credentialing decisions based on inappropriate utilization can be seen, at least partly, as a form of economic credentialing. In using such a broad brush approach to economic credentialing, it is likely that one could identify many more cases than noted here that are based on utilization problems underscored by serious financial concerns on the part of the hospital. Continuing in the context of overutilization is the New Jersey case of Edelman v. J.E Kennedy Hospital"3 which, unlike Knapp or Rao, is rooted much more directly in the economic concerns of the institution, resulting from a particular physician's hospital practices. There, the hospital utilization review data demonstrated that the plaintiff physician's lengths of stay were inappropriate, even taking into account patient age adjustments.174 Additionally, the plaintiff demonstrated a pattern of excessive and unnecessary use of diagnostic tests.175 The hospital denied Edelman reappointment, and in doing so, did not mention quality of care, but focused on utilization problems which the institution noted cost the facility more than one-quarter of a million dollars as a result of payment denials.176 The New Jersey court dismissed Dr. Edelman's challenge to the hospital's action, concluding that the credentialing decision was an exercise of the board's duty to administer the affairs of the institution in an "orderly and efficient manner."177 To date, the Edelman case represents the best example of economic credentialing in the overutilization area. The case demonstrates that, as in exclusive contract situations and closed medical staff cases, a court will allow an economic rationale to be a compelling one. Based on Edelman, one can argue that overutilization leads to economic injury that, regardless of quality concerns, can constitute sufficient grounds for an adverse credentialing decision. Turning away from overutilization as an economic measure of physician performance, there are even fewer reported cases in which hospitals have attempted to judge medical staff physicians on parameters that are economically based. In Maltz v. New York University Medical Center, a physician brought suit to obtain hospital privileges and to enjoin the institution from violating a New 'York law that limited the grounds on which physicians could be denied hospital privileges. The New York law holds that it is an improper practice for a hospital to deny medical staff privileges 172

Pinkney, Hospital MDs Facing Tough Times, A m . M e d . N e w s , Dec. 1 5 , 1989, at 6 - 7 . N o . C-2104-80 (N.J. Sup. C t . 1982), cert, denied, 9 6 N . J . 2 8 9 , 4 7 5 A.2d 5 8 5 (1984). 174 Id. 175 Id. 176 Id. 177 Id. 178 121 A.D.2d 323, 503 N.Y.S.2d 570 (1986). 173

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



unless the reasons stated are related to patient care, patient welfare, the objectives of the institution, or the physician's character or competency.179 The hospital refused to grant privileges to the plaintiff because it had a bed limitation and sufficient staffing in the plaintiffs area of practice.180 Thus, the decision was not premised on a typical credentialing evaluation in that it had nothing to do with the physician's competency, but was based strictly on managerial realities. One could argue, however, that hospital capacity is ultimately related to quality of care, but such an argument was not necessary in the New York case. The Maltz court followed the state Public Health Council's conclusion that the hospital's conduct was related to institutional objectives.181 Based on Maltz, it seems legally feasible in New York state to make credentialing decisions on the basis of business criteria because the related statutory law is broad enough to accommodate reasonable economic criteria. In another New York case, Jackaway v. Northern Dutchess Hospital,™2 a physician challenged the hospital's change of his medical staff status from "active" to "courtesy" on the basis of the same statute noted above in the Maltz case. Although members of the hospital courtesy staff could admit patients, they were restricted in their ability to participate in medical staff affairs. The hospital's rationale for reducing Dr. Jackaway's privileges was his failure to admit the requisite number of patients in the year prior to the action.183 Northern Dutchess Hospital established a policy that, in order for physicians to retain active status, they must admit 25 or more patients to the institution annually. Dr. Jackaway alleged that this policy violated New York state law.184 The reasoning for the hospital policy was not articulated in the Jackaway case, but the court followed the Public Health Council's finding that the action was adequately related to hospital objectives.185 The court noted that the plaintiff failed to allege bad faith on the part of the hospital. Accordingly, the court concluded that it would accept the institution's action relative to the plaintiffs privileges.186 At this writing, research has uncovered only one case in which a physician may have been refused medical staff privileges by a hospital because the physician's past practice reflected admission of too many Medicaid patients. In the California case of Silverman v. St. Rose Hospital,187 179 180 181 182 183 184 185 186 187

N.Y. P U B . HEALTH LAW § 2801-b (McKinney 1985). Maltz, 5 0 3 N.Y.S.2d at 5 7 1 . Id. 139 A.D.2d 496, 526 N.Y.S.2d 599 (1988). Id. at 600. Id. Id. Id. N o . H-129176-4 (Cal. A p p . Dec. 15, 1989) (on file with author).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



the plaintiff, an obstetrician, argued that he was denied an appointment to the medical staff, not on the basis of competence or qualifications but because the hospital feared it would lose revenue if he continued to treat a high volume of Medicaid covered women.188 The plaintiff, initially denied privileges, sought to circumvent the hospital appellate process by going directly to court, arguing that he could not receive a fair hearing within the institution.189 The court rejected the physician's petition for a writ on procedural grounds and thus never dealt with the question of whether a hospital can deny privileges to a physician on the basis that the individual may cause the institution to lose money.190 While anecdotal evidence has emerged about other situations in which physicians lost privileges because of uneconomical practice patterns, this aspect of credentialing, based on explicit economic criteria, has not yet been subjected to detailed legal scrutiny by any court.191 II. ECONOMIC CREDENTIALING: LEGAL CONSIDERATIONS Looking collectively at the statutory and common law reviewed concerning credentialing, it does appear, at least in theory, that a hospital may expand the basis upon which physician performance is appraised to include review based on economic measures. Clearly, there are political problems attached to pursuing economic credentialing, and the manner in which courts will react to this type of credentialing is a matter of speculation. Issues of logistics would need to be resolved, and corporate and medical staff bylaws may need to be revised. In addition, a program of economic credentialing raises two legal concerns not previously discussed—whether an antitrust issue may arise, and whether new economic evaluation standards could withstand judicial challenge. A. Antitrust Considerations In recent years, antitrust law has taken on growing importance in its relationship to hospitals with an increased realization that inappropriate institutional business practices can result in anticompetitive outcomes that may be in violation of state and federal antitrust laws.192 In the medical staff area, there have been a number of cases in which physicians denied privileges have sued on the basis of antitrust law.193 Most typically, medical 188 189 190 191


Id. Id. Id. Pinkney, supra note 172, at 6-7. But see Rosenblum v. Tallahassee Mem. Reg. Med. Ctr., No. 91589 (Leon Cty. Fla. 1991). F o r a n overview of t h e antitrust l a w aspects of the healthcare field, s e e generally G . A N N A S , S. LAW, R . ROSENBLATT, & K . W I N G , A M E R I C A N H E A L T H L A W 7 9 6 - 8 4 6 ( 1 9 9 0 ) .


Blumstein & Sloan, supra note 6 (entire article deals with this subject).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



staff antitrust challenges tend to be filed as section 1 violations of the Sherman Act.194 Section 1 violations involve illegal restraints of trade, such as a conspiracy, group boycott, or concerted refusal to deal.195 One of the best known medical staff antitrust decisions is the case of Weiss v. York Hospital.m This is an interesting case because the appellate court carefully analyzes all of the major elements of a section 1 violation, namely the existence of a contract, combination, or conspiracy, a restraint of trade and the effect of the action on interstate commerce.197 In Weiss, the plaintiff, an osteopathic physician, sued York Hospital alleging that the institution's refusal to admit him to its medical staff was an illegal restraint of trade. The plaintiff alleged a conspiracy against him existed on the grounds that the hospital and the medical staff were two distinct entities that had conspired together.198 In the alternative, Weiss argued that members of the medical staff were each separate economic units who competed against each other and, as a matter of law, constituted a "combination" within the meaning of the Sherman Act.199 The court rejected the notion that a hospital and its medical staff were separate entities for antitrust purposes, but agreed that a medical staff is a combination of individuals with disparate interests, and not a single economic unit.200 Thus, according to Weiss, a medical staffs actions can be subject to the scrutiny of section I.20' The refusal of the York Hospital medical staff to recommend Weiss' application for privileges was interpreted by the court as a group boycott or a concerted refusal to deal.202 The court reached this conclusion because Weiss' application was rejected not because he lacked competence, but because he was an osteopathic physician, a group the medical staff did not want associated with the hospital. The Weiss court reasoned that the conduct of the medical staff was equivalent to a group boycott and was plainly anticompetitive.203 By designating the conduct a group boycott, the court was able to categorize the actions taken against the plaintiff as a per se violation of the Sherman Act and avoid a lengthy rule of reason analysis that would have focused on institutional motivation and business objectives. In acting against Weiss the institution expressed no public service or ethical rationale for discriminating against osteopaths, which, under the 194

15 U.S.C. § 1 (1991). Id. 196 745 F.2d 786 (3d Cir. 1984). 197 15 U.S.C. § 1 (1991). 198 Weiss, 745 F.2d at 813. 199 Id. 200 Id. at 815. 201 Id. at 816. 202 Id. at 818-20. 203 Id. at 820. 195

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



learned profession rule, could have taken the case out of the more stringent per se analysis.20* Although Weiss is particularly illustrative of a section 1 violation, the case is somewhat unique in that the court found a per se violation. Had the court not concluded that the medical staff conduct constituted a group boycott, rule of reason analysis would have been applied. Under the rule of reason, as noted, other factors would need to be considered. In determining whether there was a rule of reason violation, a court would consider the competitive significance of the alleged restraint, the peculiar nature of the business in question, the reasons for the restraint, and most importantly, whether the restraint in balance should be prohibited.205 The 11th Circuit Court of Appeals, in Bolt v. Halifax Hospital Medical Center,206 correctly noted that few medical staff conspiracies can be proven with direct evidence. Relying on circumstantial evidence, a conspiracy would have to be demonstrated as inuring economic benefit to the defendants, and excluding possibilities that co-conspirators acted independently and in a manner consistent with business objectives.207 Clearly, in applying criteria such as economic standards, one could argue that a medical staff is conducting itself in a manner that relates to the institution's business objectives. Beyond proof of conspiracy, a rule of reason analysis would require a demonstration that the illegal conduct in question had an impact on competition in a relevant market. Without proof that the purported conspiracy had an anticompetitive effect, there cannot be a finding of restraint of trade.208 In such an analysis, all the circumstances of the case must be weighed to determine whether the restrictive practice imposes an unreasonable restraint on competition. In Weiss, a whole class of physicians was affected by the hospital policy, but when only one physician is so affected, demonstrating adequate economic injury may be very difficult. If a hospital adopted economic credentialing, then it might be problematic for a plaintiff, in a rule of reason situation, to overcome a defense argument that such evaluation is justified by the need for operational efficiency. In the case of Hassan v. Independent Practice Associates,209 a Michigan federal district court applied a rule of reason analysis to a group of physicians' section 1 challenge against an Independent Practice Association (IPA) for termination of their contracts. The termination was based on

204 205 206 207 208 209

Id. at 820-22. Blumstein & Sloan, supra note 6, at 39-53. 851 F.2d 1273 (11th Cir. 1988). Blumstein & Sloan, supra note 6, at 52. Id. at 86-87. 698 F. Supp. 679 (E.D. Mich. 1988).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



the plaintiffs' pattern of excessive allergy testing.210 The court ruled that expulsion of the physicians from the IPA was justified by the plan's cost containment objectives and that a prepaid plan had a right to restrict its dealings to physicians whose practices were in line with the plan's operational philosophy.2" Similarly, one could argue that a hospital that uses economic measures to evaluate physicians can do so if such measures are compatible with the overall institutional objectives to contain costs and operate in a more businesslike manner. Clearly, under a rule of reason analysis, an economic rationale can serve to justify behavior that could be construed as having an anticompetitive impact. Medical staff antitrust challenges are generally cast as horizontal restraints of trade in which the medical staff, composed of independent competitors, act in collusion against a plaintiff physician. It was generally thought that medical staff cases could not be classified as vertical restraints of trade in that the staff was viewed as an agent of the hospital and thus the two were essentially seen as one.212 Recently, legal commentators have argued that the interests of the hospital and medical staff may be distinct.213 In particular, a hospital may wish to evaluate physicians in credentialing processes based on their economic performance. Such a process clearly is different from a medical staff credentialing model. When a hospital board initiates a cost containment program that results in evaluation of physicians based on economic measures, it may be argued that such a decision is vertical in character. If the two entities, the hospital corporation and the medical staff, are viewed as separate from each other, then the possibility emerges that the two could act jointly to restrain a particular physician from competing.214 Practically speaking, whether a section 1 violation is horizontal or vertical will not alter the nature of the economic injury, but it does expand the range of possibilities upon which an antitrust violation can be based. The vertical nature of the institution-medical staff relationship does not necessarily lead to conduct violating antitrust law, because fiscally motivated hospital policies that the two groups generate may be viewed as legitimately procompetitive. Because antitrust is a rather fluid area of law, it is conceivable that a violation could be construed as a form of monopolization under section 2 of the Sherman Act.215 For a section 2 violation to occur, it must be shown that either the medical staff or the hospital's conduct "threatens actual 210 211 212 213 214 215

Id. at 683. Id. at 684. Blumstein & Sloan, supra note 6, at 56. Id. at 59-65. Id. 15 U.S.C. § 2 (1991).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



monopolization."216 Although one could conjure up scenarios in which there is an attempt by the medical staff to establish a monopoly that would have an adverse impact on a marketplace, such a scenario would not be as likely to occur as some type of section 1 restraint of trade violation. In looking at antitrust law in the context of medical staff credentialing, the federal Health Care Quality Improvement Act (HCQIA) of 1986217 must be considered. Under this statute, a limited federal immunity is provided that would clearly apply in the context of antitrust actions.218 The immunity was granted by Congress to encourage physician participation in peer review activities and to assist in overcoming physician concerns about antitrust liability that were raised by the case of Patrick v. Burget.219 To achieve antitrust immunity under the HCQIA, certain statutorily specified conditions must be met.220 The medical review in question must be a "professional review action" made by a "professional review body" in the belief that it will further quality health care. The review must be factually based, appropriately reported, and result from a fair process.221 The immunity that appears was clearly established to protect genuine peer review activities and is not designed to circumvent the antitrust laws.222 In the case of Austin v. McNamara,223 the United States District Court for the Central District of California granted summary judgment in favor of the defendant Cottage Hospital, holding that the HCQIA immunized the institution from a physician's antitrust challenge arising out of the peer review process. Dr. George M. Austin, a neurosurgeon, alleged that three neurosurgeons on the staff of Cottage Hospital conspired against him in violation of the Sherman Act and intentionally interfered with his medical practice.224 Through a detailed peer review process, Dr. Austin was summarily suspended and eventually reinstated to the staff but with restricted privileges.223 The court found all of the elements needed to invoke the HCQIA immunity present in the hospital's conduct.226 In turn, the plaintiffs antitrust allegations were based on hearsay and failed to refute the presumption of immunity.227 Had Dr. Austin been able to prove that antitrust laws were violated, it 216 217 218 219 220 221 222 223 224 225 226 227

Id. 42 U.S.C. §§ 11101-11152 (1991). Id. § 11111(a)(1). 486 U . S . 94 (1988). 4 2 U.S.C. § 2 . Id. Blumstein & Sloan, supra note 6, at 3 9 . 731 F. Supp. 934 (C.D. Cal. 1990). Id. at 934. Id. at 936-38. Id. at 939-42. Id. at 942.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



seems clear that the conditional immunity created by the HCQIA would not have held up. The Austin case, together with the legislative history of the statute, underscores the point that immunity can only attach to situations in which the parties are engaged in genuine peer review, attempting to ensure quality medical care.228 An interesting question that the HCQIA raises in relation to economic credentialing is whether the statutory immunity would apply to a process geared to enhance economic efficiency.229 If the goal of credentialing is to ensure efficient resource utilization, removed from the concerns about quality, one could argue that the statutory immunity may not apply.230 It may be difficult, however, to segregate purely economic criteria from general clinical criteria and argue persuasively that a credentialing review process is devoid of a quality component. It is unlikely that economic credentialing will stand on its own, but rather a particular physician appraisal may be altered to also include various economic measurements. Furthermore, under the statutory definition of "professional review action," the review in question must be based on evaluation of competence or professional conduct. It would seem that economic credentialing criteria could be related directly to either competence or professional conduct. Indeed, scenarios can be construed in the context of economic credentialing that may be per se violations of the Sherman Act, or may not be justifiable under a rule of reason approach. For example, if a group of physicians on a medical staff act in collusion to deny or revoke a colleague's privileges solely for their own economic gain, that conduct, if it impacts on the relevant market, may be actionable. It would seem, however, that mere application of economic criteria in the credentialing process, either at the medical staff or board level, should not inherently lead to violation of antitrust laws. The mere fact that economic standards applied by competitors are being used to evaluate a physician should raise a heightened concern about antitrust, but in and of itself, application of such standards should be viewed neutrally. More than likely, under a rule of reason analysis, application of economic criteria will be justified in keeping with legitimate business objectives. Only when it can be demonstrated that economic criteria were inappropriately applied for the financial advantage of members of the medical staff could an antitrust violation be sustained. B. Economic Standards The second major point of consideration in developing an economic credentialing program concerns the legal status of newly created economic

228 229 230

Id. at 938-39. Hall, supra note 123, at 521-22. Id.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



standards. It is likely that a physician who has been adversely affected by the application of new evaluation criteria will challenge their validity. Such a challenge may be directed not only toward the application of standards but to the essence of the standards themselves. It is thus necessary to consider whether economic credentialing standards will be viewed by the courts as authoritative, or whether they will be seen as only arbitrary directives lacking in reliability and, as such, an inappropriate basis for legal determinations. Much of the legal discussion dealing with medical standards concerns questions of whether new medical standards can be used as evidence in malpractice litigation.231 As a general rule, admissibility questions focus on procedural issues of evidence, judicial notice, and use of expert witnesses.232 Clearly, courts are not required to allow new medical standards as evidence, but there is a strong body of precedent supporting the admission of evidence that illuminates relevant custom and practice.233 With the proliferation of new clinical protocols and utilization review guidelines, concerns of how such medical standards will be treated by the courts are much broader than the narrower questions addressed here regarding the use of economic credentialing guidelines as evidence.234 The nature of the legal challenges against an adverse credentialing determination based on economic criteria places the admissibility question in a somewhat different light from a medical malpractice action. In physician challenges attacking the validity of an economic credentialing program, the standards would be directly at issue, and as such, would be admitted into evidence. There may, however, be situations in which a hospital would attempt to justify its behavior by using economic credentialing standards as a defense. In such a situation, it is conceivable that the plaintiff physician may attempt to block admission of economic standards, arguing that they were inappropriately developed or misapplied, and as such, do not constitute reliable evidence. The nature of an evidentiary challenge will depend, to some extent, on how economic standards are to be used at trial—whether as resource information, as the actual standard, or as evidence to impeach another's testimony.235 It is most likely that a court will admit economic evaluation standards into evidence if they are relevant in a particular credentialing situation. The 231

232 233 234 235

See generally Kinney & Wilder, Medical Standard Setting in the Current Malpractice Environment: Problems and Possibilities, 2 2 U . C . DAVIS L . REV. 4 2 1 (1989); Schockemochl, Admissibility of Written Standards as Evidence of the Standard of Care in Medical and Hospital Negligence Actions in Virginia, 18 U . R I C H . L . REV. 7 2 5 (Summer 1984). Kinney & Wilder, supra note 2 3 1 , at 442-50. Schockemochl, supra note 2 3 1 , at 737. Kinney & Wilder, supra note 2 3 1 , at 442-50. Id. at 443.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



point of challenge that a physician plaintiff is likely to raise is that the standards are arbitrary and unenforceable. In this regard, a court will be required to evaluate the intended use of the standards, the entity that developed them, and the explicit content of the standards.236 If an economic standard were developed to assist in evaluating physician performance for purposes of determining whether the individual needed further clinical education, then it could be argued that such a standard ought not be applied as a determinative factor at a trial to judge the propriety of a credentialing decision. In view of the flexibility that courts have allowed hospitals to apply reasonable credentialing criteria, it may be difficult to demonstrate, in a given case, that economic guidelines were not appropriately used. It appears that standards for evaluating physicians are often common to quality assurance, utilization review, and credentialing, and there is considerable overlap among these processes. Accordingly, it would be difficult to limit the application of a set of standards to only one type of evaluation. It may be difficult to draw rigid lines around economic evaluation standards and distinguish them at trial as part of an appraisal that is different from credentialing. When economic standards are institution specific one might be able to argue that they have limited applicability and are perhaps conceptually flawed. Theoretically, the more localized the development of the standards, the more possible the argument that they were inappropriately developed. On the other hand, a jury may be impressed by the fact that particular economic credentialing standards were developed to fit the exigencies of a given hospital situation, and thus view such standards as even more appropriate than regional or national guidelines. Hospitals can purchase a variety of software packages to measure physician economic performance, which ought to buttress the legitimacy of an institution's economic credentialing efforts. But even a nationally developed software package must be tailored to the institution, and it is the hospital that must establish its own baselines as to what is acceptable economic performance.237 To demonstrate arbitrariness, a plaintiff physician may be required to show not only that the development of standards was not accurate, but that the application was in some significant manner erroneous. As far as the character or nature of a set of standards is concerned, it may be possible to attack their application if one can show that the standards used to judge a particular physician were too general. If the standards establish only vague guidelines, then a physician might argue that he 236 237

Id. at 447. Shortel, Morrissey, & Conrad, supra note 7. See also Eller & Teplizky, Considering Factors in Hospital Privilege Decisions, 3 HEALTH SPAN 12 (Aug.-Sept. 1986).


Downloaded by [Temple University Libraries] at 14:01 16 November 2014



or she did not have adequate notice as to what conduct was expected, and that because of vagueness, a negative judgment founded on such standards could be considered arbitrary. Clearly, a hospital that utilizes economic credentialing will need to develop standards that are specific enough to withstand such challenge without hindering the evaluation process with measurements that are too detailed. Again, the premise to be referenced in evaluating a particular set of standards is the judicial precedent that creates a climate of tolerance for the adoption and use of standards that are reasonably related to the hospital's operational objectives. If one can demonstrate that standards are unreasonable, irrational, or overly vague, then they may be successfully challenged.238 III. THE HOSPITAL BOARD AND ECONOMIC CREDENTIALING Moving away from consideration of economic credentialing in the context of the medical staff, the development of such a process needs to be evaluated relative to the hospital board. In the hierarchy of the hospital corporation, the board holds ultimate decisionmaking authority.239 In credentialing, the final decision to appoint, reappoint, deny appointment, or alter privileges rests with the governing body. What has evolved in the hospital structure is a somewhat unique corporate model in which a medical staff is a self-governing entity that has delegated functions assigned to it by the corporation, one of which is credentialing. When there are proposed expansions of the credentialing function, such as the addition of economic analysis of physicians, it becomes necessary to consider whether the board possesses the necessary mandate to promote a development such as economic credentialing. A. Hospital Boards—A Legal Perspective As with credentialing, there is an extensive body of law, statutory and common, as well as JCAHO accreditation standards, that detail the legal status and responsibilities of a hospital board.240 There are a range of statutes on the state level that touch on the legal duties of hospital governing boards.241 Some jurisdictions have specific statutes and regulations that cover hospital boards, in some instances distinguishing between public and private entities. In a number of states, hospital trustee requirements are 238 239

Kinney & Wilder, supra note 2 3 1 , at 442-50. F o r a general discussion of the role of hospital boards, see A . SOUTHWICK, T H E LAW O F HOSPITAL AND HEALTH C A R E ADMINISTRATION 4 6 - 5 7 (1988).

240 241

J C A H O , supra note 4 7 , at Governing Board ¶¶ 1.7-1.19. C O L O . REV. STAT. § 25-3-302 to 304 (1989); F L A . STAT. A N N . § 155.06 (West 1989); M I C H . COMP.

LAWS A N N . § 331.153 (West 1989).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



spelled out in general nonprofit or for-profit corporation laws that are not unique to acute care facilities.242 Although there are clear variations in the specificity of legal requirements that cover boards, the various state statutes and regulations referenced give one a sense of the nature of the governing entity's legal duties.243 For example, under Illinois law, boards are charged with responsibility for the hospital organization, management, control, and operation, including appointment of the medical staff.244 Illinois regulations further require boards to adopt bylaws, meet regularly, employ a competent administrator and other personnel, maintain professional standards, and establish policies for investigating unusual incidents.245 In California, boards are specifically charged with providing for the control and use of the financial resources of the hospital.246 Under some state laws, a clear distinction is made between the role of the board and the medical staff. For example, under Florida law it is stated that the medical staff has the authority to conduct credentialing activities and that authority is not to be restricted.247 It is interesting that in the same section of the Florida law noted above, the medical staff has the authority to make recommendations to the board about appointment and reappointment, and the board has the right to add evaluation criteria beyond what is statutorily mandated.248 Under California law, the notion of a selfgoverning medical staff is clearly established, but here too, final credentialing authority is vested in the board.249 Under the accreditation standards of the JCAHO, it is very well established that the medical staff conducts the actual credentialing review process, but as in state law, the authority to make final decisions is held by the governing body.250 The actual mechanics of credentialing procedures must be specified in the medical staff bylaws and the board must act on the staff recommendations in a timely manner.251 When there is a disagreement between the board and the medical staff over credentialing matters, the JCAHO standards require resolution in a timely fashion that requires some

242 243


245 246

247 248

ALASKA STAT. § 10.20.081 (1989); KY. REV. STAT. A N N . § 273.215 (Michie/Bobbs-Merrill 1988). C O L O . REV. STAT. § 25-3-302 to 304 (1989); F L A . STAT. A N N . § 155.06 (West 1988); M I C H . COMP.

LAWS A N N . § 331.153 (West 1989). I L L . A N N . STAT. ch. 111 1/2, ¶ 142-47 (Smith-Hurd 1990); ILL. ADMIN. CODE tit. 7 7 , § 250.210 (1987). I L L . ADMIN. C O D E tit. 7 7 , § 250.210 (1987). C A L . A D M I N . C O D E tit. 2 2 , § 70701(a)(6) (1991).

F L A . STAT. A N N . § 395.001(5) (West 1986). Id. § 395.011(6).


C A L . ADMIN. C O D E tit. 2 2 , § 70701(a)(1)(F) (1991).


JCAHO, supra note 4 7 , at Governing Board ¶ 1.13. Id.


Downloaded by [Temple University Libraries] at 14:01 16 November 2014



type of joint conference mechanism to be in place.252 Clearly, the JCAHO standards affecting board functions will be mirrored in institutional and medical staff bylaws, and those bylaws will be binding on the hospital.253 The case law dealing with the role of a hospital board is extensive. There are two lines of judicial authority that can be explored in probing how the courts have reviewed the role of hospital governing entities. On the one hand, the progeny of cases extending from Darling v. Charleston Community Hospital,254 which impact on the overall hospital corporate duty, are relevant. On the other hand, there are cases that deal specifically with questions of board responsibility and scope of authority.255 In examining Darling and its progeny, what emerges, as noted earlier, is a clear duty on the part of the hospital corporation to take the necessary steps to ensure an appropriate level of quality medical care within the institution.256 As the ultimate authority in the hospital, corporate duties rest with the governing entity. The corporate quality duty manifests itself most clearly in a legal requirement to engage in effective credentialing. In the Florida case of Insinga v. Labella,™ the Supreme Court of Florida found that a hospital possessed a corporate obligation to grant and continue medical staff privileges of qualified individuals, and that failure to do so would result in corporate liability. The Ohio appellate court, in Albain v. Flower Hospital,25* noted that, under a hospital's corporate responsibility, it has a duty to its patients to ensure the competency of its medical staff and the quality of care provided through "prudent selection, review and continued evaluation" of physicians who are granted staff privileges. Quite clearly, the Albain court and others that have identified an independent corporate duty for a hospital have translated that duty into a responsibility to engage in credentialing that becomes a board obligation. New Jersey courts have cast the role of the governing body in an interesting light, as a fiduciary of the public. While the characterization of a board as a guardian of the public interest has not been made in other states, it is a helpful analysis in understanding the nature of a board's role, and is a viewpoint that can be applied generally. In the case of Desai v. St. Barnabas Medical Center,259 the New Jersey Supreme Court pointed out that hospital powers relating to the quality and extent of institutional facilities and services must be exercised reasonably for the public good and 252

Id. ¶ 1.5. See supra notes 54-59. 254 Darling, 211 N.E.2d at 253. 255 A. SOUTHWICK, supra note 239 (discussing all cases). 256 Id. 257 543 So. 2d 209, 214 (Fla. 1989). 258 N o . L-87-290 (Ohio App. 1988). 259 103 N . J . 7 9 , 510 A.2d 662 (1986). 253

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



must serve public health objectives. Board actions in credentialing under the New Jersey standard will be measured against a litmus test of whether they advance the public's health reasonably and rationally. In Berman v. Valley Hospital,260 the New Jersey Supreme Court further emphasized that, in situations where credentialing decisions have a discriminatory impact on an individual or a group of physicians, the nexus to a public interest becomes even more critical. Although New Jersey and other states have allowed hospital boards wide discretion in the appointment and reappointment areas, such discretion is not boundless. Clearly, boards in all states are required to take actions that are rational and reasonably related to overall hospital objectives.261 There are specific limitations on hospital boards unique to particular states that must be taken into account. For example, in Florida, board members are provided with legal immunity from civil liability when engaged in the credentialing process.262 The Florida immunity is not, however, open-ended as pointed out in two recent Florida state cases.263 In order for a Florida hospital board to avail itself of immunity in credentialing, it must demonstrate that its actions were taken for a good cause, in good faith, and without malice.264 In Lake Hospitals Clinic, Inc. v. Silversmith,265 the Florida appellate court found that the evidence in the case raised serious doubts about a hospital board's motives in revoking a physician's medical staff privileges, thus raising a question on retrial about the governing entity's immunity. Recently, the Illinois Supreme Court, in Cardwell v. Rockford Memorial Hospital Association,266 ruled that a state hospital immunity provision applying to credentialing was absolute and unqualified, and that it applied even if the hospital board's conduct was willful and wanton. The Cardwell court interpreted the state law on its face, but it is an interpretation that hospital boards in other jurisdictions would be ill advised to follow. Without blanket statutory immunity, boards should act in a manner envisioned by the Florida courts, as noted in Silversmith, for it is difficult to imagine that a board that behaves unreasonably could argue it was functioning within its legal mandate.

260 261

262 263

264 265 266

103 N . J . 100, 510 A.2d 673 (1986). It is interesting that the explicit recognition of a governing entity as a public fiduciary seen in New Jersey places a check on actions that are motivated solely for managerial reasons that may not be present in other jurisdictions. F L A . STAT. A N N . § 768.40(4) (West 1981). See Lawler v. Eugene Wuesthoff Memorial Hosp., 497 So. 2d 1261 (Fla. 1986); Lake Hosp. & Clinic, Inc. v. Silversmith, 551 So. 2d 538 (Fla. 1989). 551 So. 2d 538 (Fla. 1989). Id. at 5 4 3 . 136 Ill. 2d 5 7 1 , 555 N . E . 2 d 6 (1990).



Downloaded by [Temple University Libraries] at 14:01 16 November 2014

B. The Fiscal Fiduciary and Economic Credentialing Governing boards generally, both public and private, have a wellrecognized and long-standing obligation to act as fiscal fiduciaries of their respective organizations.267 Under both state law and JCAHO accreditation standards, hospital boards are charged with obligations to oversee the financial affairs of their hospitals.268 Although one can extrapolate from case law that lays out general governing body responsibilities, fiscal oversight is such an inherent and widely recognized obligation that there are few cases dealing with it directly in the hospital board context. In Buchland v. Board of King County,269 a physician had his medical staff privileges revoked at a public facility, Evergreen Hospital, for failure to purchase professional liability insurance. The county hospital board was then sued. The Supreme Court of Washington ruled in favor of the county board finding that there was a compelling governmental interest requiring a physician to have liability insurance coverage and that the hospital's bylaw requirement constituted a reasonable, unrestrictive way to protect patient interests.270 In its discussion, the court indicated that a hospital board has a duty to protect the financial well being of the institution. Accordingly, enforcing a requirement that hospital medical staff physicians have malpractice insurance was in keeping with that duty.271 In the case of Stern v. Lucy Webb Hayes National Training School for Deaconesses and Missionaries,212 a group of health care purchasers brought suit against a hospital alleging that they were economically injured as a result of hospital trustees' self-dealing. It was alleged that the Clayton Act was violated because trustees who were representatives of various financial institutions steered hospital business to these institutions on terms and rates favorable to trustees and banks, causing excessive costs to be passed on to patients.273 The plaintiffs failed to successfully pursue their claim because they were unable to demonstrate standing and their class certification was denied by the court.274 What is clear from the case is that a board cannot engage in blatant self-dealing. Accordingly, had the procedural problems not been present in the case, the trustees' conduct may have been actionable. It is a well established legal principle that board members


E. HAYT, L . HAYT, & A . GROESCHEL, supra note 2 4 , at 120.


See, e.g., J C A H O , supra note 4 7 , at Governing Board ¶ 1.9; C A L . ADMIN. C O D E tit. 2 2 , § 70701(a)(6) (1991). 106 Wash. 2d 632, 724 P.2d 981 (1986). Id. at 989. Id. at 984. 367 F. Supp. 536 ( D . D . C . 1974). Id. at 537. Id. at 5 3 8 , 5 4 0 .

269 270 271 272 273 274

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



cannot act in ways to enrich themselves at the expense of the entity they are entrusted to serve. While self-dealing may go beyond a fiscal fiduciary obligation, the financial area is one in which boards have a particular responsibility to act in the best interests of the hospital. Evaluation of the restraints on hospital boards leads to the conclusion that the restraints are not overly limiting. Assuming that trustees act reasonably, in good faith, in the best interests of the institution, and do not engage in self-dealing, they have a great deal of freedom in how they carry out their corporate mandates. And as noted, in some jurisdictions, board members are insulated from civil liability concerns by virtue of state law immunity provisions.275 It is quite clear that, under statutory and common law, as well as JCAHO standards, hospital boards have final legal authority over credentialing.276 In addition, the board has the right to establish standards for physician appraisal that relate to hospital objectives. Under the selfgoverning medical staff model, boards delegate clinical assessment responsibilities to the medical staff; nevertheless, final authority for the overall process rests with the board. The governing body has the requisite authority to adopt physician evaluation criteria that require medical staff members to be evaluated on the basis of economic performance. Clearly, an appraisal that focuses on financial performance measures would be in keeping with the board's legitimate concerns as fiscal fiduciary of a hospital. Not only does a board have the legal authority to introduce economic evaluations into credentialing, an argument could be made that it has a mandate to do so. In institutions where data systems are in place that generate physician clinical and financial profiles, a board will have the ability to make the necessary correlations required for a program of economic credentialing. As the fiscal fiduciary of a hospital, a board confronted with data showing that a given practitioner's hospital practice is financially out of line with institutional business objectives may be required to act. Although the governing entity will be inclined to delegate physician economic evaluation to the medical staff, as in credentialing generally, the ultimate responsibility rests with the governing entity. A board mandated program in economic credentialing undoubtedly will encounter resistance from hospital medical staffs. From a legal standpoint, the primary argument that a medical staff is likely to raise is that a request to incorporate economic analysis into credentialing interferes with



D E L . C O D E A N N . tit. 2 4 , § 1786 (1988); M D . HEALTH O C C . CODE A N N . § 14-1601(f) (1989); N . C . G E N . STAT. § 131E-95(a) (1983). A . SOUTHWICK, supra note 239, at 4 5 , 50-52.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



the concept of a self-governing medical staff required by JCAHO.277 A governing body cannot unilaterally amend the medical staffs bylaws to allow for economic credentialing without consultation and agreement of the medical staff.278 To expect a medical staff to adopt a program of economic appraisal of physician credentialing without the necessary amendments to the medical staff bylaws is not realistic and may constitute a violation of JCAHO standards. Under state law the concept of an independent selfgoverning medical staff emerges in varying degrees. For example, in Florida, state law provides the medical staff with the necessary authority to conduct credentialing.279 It is apparent that Florida law dealing with credentialing is underscored by the self-governing medical staff model, but this is not universally true in other jurisdictions. California law is more explicit in its endorsement of the independent, self-governing medical staff, for it clearly states that the medical staff has control over professional work performed in the hospital.280 The split between medical staff and the board has been reinforced in California with the passage of the state Peer Review Law,281 which specifies procedural and evidentiary rights for physicians who have been affected by adverse credentialing decisions. The California law limits the ability of the governing body to act independently of the hospital's medical staff peer review committee.282 Only when a peer review committee refuses to take action against a physician can the board of a California hospital do so, and only if adequate notice is given to the medical staff.283 It is interesting to note, however, that even with new restrictions on board initiatives, the final responsibility and liability for credentialing still rests with California hospital governing bodies.284 In the case of Eisenhower Memorial Hospital v. Stoltzman,2*5 a hospital governing board sued its own medical executive committee attempting to secure a temporary restraining order to keep the committee from endorsing Dr. Stoltzman's election as president of the medical staff. The defendant argued that the hospital board was infringing on the medical staffs rights as a self-governing entity to elect its own officers. Under provisions of the hospital bylaws, the board had the right to approve medical staff elections. Eventually, the hospital withdrew the suit and amended its by277

Hall, supra note 123, at 525-30. Id. 279 F L A . STAT. A N N . § 395.011(1)-(11) (West 1986). 280 C A L . ADMIN. C O D E tit. 2 2 , § 70701 (e)(l)(F) (1991). 281 C A L . B U S . & PROF. C O D E § 809-809.9 (West 1989). 282 Id. § 809.05. 283 Id. § 809.05(b) & (c). 284 Id. § 809(8). 285 No. 1-53964 (Cal. App. Dec. 29, 1988) (on file with author). 278

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



laws to comply with the defendant's position that election of officers was a matter for the medical staff alone to decide.286 Outside of California, the legal line of demarcation between the board and the self-governing medical staff is not so clearly drawn, and boards may take a more directive stance in areas in which they have ultimate authority. In fact, it is quite clear that boards, in view of hospital corporate liability and legal mandate, cannot be passive in the area of credentialing and may have to initiate changes in physician evaluation processes that will test the balance between physicians and hospital administration. As the final legal authority in the hospital, the governing body has an obligation to undertake actions that are in keeping with the institutional missions in both quality of care and business areas. IV. AN EMPIRICAL STUDY ON HOSPITAL CREDENTIALING To achieve a broader perspective on economic credentialing, an empirical study of this subject was developed. The broad purpose of the study was to ascertain the extent to which economic factors affect medical staff credentialing and to determine if facilities have implemented economic credentialing programs. The study was conducted by use of a questionnaire that was administrated by telephone. A total of 25 hospitals from 13 states participated. The hospitals ranged in size from 181 to 785 beds.287 Included in the sample were a mix of institutions representing community, teaching, public, for-profit, and nonprofit hospitals. Individual respondents were drawn primarily from hospital management, but other individuals, including physician medical staff representatives, participated.288 The survey questionnaire contained 11 questions broken down into four areas: (1) basic accounting and data systems information; (2) general credentialing practices; (3) quality assurance/utilization review linkages to credentialing; and, (4) specific practices and attitudes concerning economic credentialing.289 A. Accounting-Data Systems In assessing the feasibility of economic credentialing, it becomes apparent that there is a need for both good clinical and financial data. Such 286 287



Id. The empirical survey involved 25 hospitals. The institutions were located in Arizona, California, Florida, Illinois, Kansas, Massachusetts, Michigan, Missouri, New Jersey, Pennsylvania, Tennessee, Washington, and Wisconsin. Interviewees included 11 chief executive officers, four medical directors, and 10 individuals whose positions included associate administrator, director of quality assurance, physician department chair, and hospital legal counsel. See Appendix (for survey questions).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



evaluation requires the ability to link physician-specific fiscal information to clinical outcome information. It was necessary in probing the economic credentialing area to determine what types of clinical outcome measurement systems hospitals have in place, as well as what types of accounting systems are being used.290 In general, the survey revealed that most hospitals are using various quality assurance tools beyond DRG physician profiles. Universally, all the hospitals in the sample indicated that they had the capability to track the clinical outcomes of individual physician admissions at the point of discharge. Most of the participating hospitals had or were in the process of adopting some type of computerized system to allow them to look at individual physician performance. The systems most frequently mentioned were the Medis Group System, Iameter, the Medical Management System, and systems designed by Ernst and Whinney. A number of respondents had designed their own computer systems to track clinical outcomes. One respondent raised a caution that hospital computer systems should not be seen as flawless, but in many instances, physician-specific information was not reliable. Only a minority of the hospitals surveyed had implemented cost accounting systems. In those without cost accounting, there was a universal expression of concern by administrators about the inadequacies of their current accounting practices. One teaching hospital executive described his institution's accounting system as "bucket oriented," with total separation of patient and physician data, and only a manual ability to integrate them. Although many respondents favored cost accounting systems, most felt that it was feasible to assess economic physician performance with charge data. B. Credentialing Processes In looking at the results of the two general survey questions dealing with credentialing, it was found that, by and large, there are few major differences in the criteria or processes used for either initial appointment or reappointment.291 Institutions tend to follow the dictates of the JCAHO and focus on issues dealing with clinical background and experience. For appointment, most respondents require information about an individual's education, residency training, prior and current hospital experiences, character references, malpractice coverage, and history. Several hospitals interviewed belong to multihospital systems, which have centralized certain aspects of the credentialing process. Although at the time of the interviews, the National Health Care Practitioner Data Bank was not functional, respondents indicated that they will need to access it as part of the appoint290




Downloaded by [Temple University Libraries] at 14:01 16 November 2014



ment process.292 Currently, the American Medical Association has a physician profile information system that one respondent indicated his hospital is using to obtain appointment data.293 Interviewees indicated that physician appraisal for reappointment was conducted every two or three years. The majority of hospitals surveyed use quality assurance data as a key component in evaluating physician performance.294 Some respondents specifically noted review of utilization review data, patient complaints, risk management information, and physician activity levels as factors in reappointment. Certain variations in credentialing processes were noted among our sample, based on the type of hospital. In the teaching hospitals, the chiefs of departments had considerable influence over credentialing whereas, in community hospitals, power in this area was split more between department heads and medical staff review committees. In most of the respondent hospitals, credentialing entailed review by two medical staff committees prior to board review. The survey did reveal that criteria for reappointment and delineation of privileges is being reassessed by many institutions, and may undergo changes resulting in the development of new standards. In each of the study hospitals, as required by law, the institution's board made the final decision concerning credentialing. By and large, most of the sample institutions had a joint medical staff board committee that dealt with credentialing matters. One hospital respondent indicated that the medical staff members of the hospital board were actively involved in credentialing and kept lay members appraised of developments in the area. It is in the joint committees that board members are able to be most active in credentialing. While the power of the board in appointment and reappointment matters was generally recognized, it did not appear from this group of respondents that boards took positions that differed from those taken by their medical staffs. Some of the sample hospitals require a special hearing at the board level when the medical staff presents an adverse credentialing recommendation, and other respondents indicated that formal mechanisms were in place to resolve disputes between the medical staff and board over credentialing, should they occur. Several respondents noted that their boards realized that they had to 292 293


4 2 U . S . C . § 11135 (Supp. 1991). Page, AMA Credentialing Service Applauded by Policymakers, Am. Med. News, June 22, 1990, at 5. It was difficult to ascertain from the responses what type of quality data specifically was utilized for physician reappraisal purposes. One institutional representative detailed a unique quality assurance profile system which systematically collects data on an individual from multiple services such as nursing, pharmacy, infection control, and the like. Once all the key inputs are made, an individual's quality assurance profile is assembled and reviewed by the chief of the relevant division. If problems are uncovered, then a physician may be subject to a "focused review" that could result in a shorter reappointment period and be conditioned on correction of the problems covered.



Downloaded by [Temple University Libraries] at 14:01 16 November 2014

become more active in credentialing and were reassessing criteria in the area, particularly in the reappointment process. One physician respondent indicated that he felt the board, as a fiscal fiduciary, was obligated to become more involved in assessing the economic impact of individual physician practices on the institution. Board members in some of the sample institutions expressed support for introducing more extensive quality and economic analyses in evaluating individual physician performance. They did, however, express concern that having boards unilaterally altering criteria for credentialing could lead to conflicts with medical staffs. C. Quality Assurance and Utilization Review Four of the survey questions addressed the quality assurance and utilization review processes.295 The purpose of probing quality assurance and utilization review in the sample hospitals was to ascertain what linkages have been created between these processes and credentialing. In addition, there was an attempt to uncover whether either quality assurance or utilization review processes focused on resource management factors. In the event that quality assurance and/or utilization review did look at these issues, that information could be valuable in an economic credentialing program. Generally, it appeared from the sample group that quality assurance data is reviewed as part of the hospital reappointment process and is, in fact, a source of essential information. One respondent expressed concerns about ensuring confidentiality of physician identifiable utilization reviewquality assurance data when it is used in credentialing. In the teaching institutions surveyed, quality assurance and utilization review information, as well as other physician performance reports, were routinely reviewed by department chiefs. It is the department chief, according to one respondent, who deals with individual quality problems and works with staff to overcome inappropriate medical practices that have adverse financial consequences. One medical director expressed the opinion that quality assurance has evolved into a quality improvement function in his institution and that if ways are found to improve quality, the economics will simultaneously improve. Most of the institutions surveyed did specifically evaluate physician resource allocation issues within their quality assurance and utilization review processes. A few respondents indicated that resource allocation was reviewed only in a limited sense as an obvious component of utilization review. In one sample institution, physician profiles are developed that include statistical data pertaining to resource utilization. This data is ana-


See Appendix.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



lyzed by both the clinical department and the credentials committee. In another sample hospital, practice patterns are reviewed at the departmental level in a routine "focus group," and such review is geared toward examining allocation issues in considerable detail. From sample responses, one can conclude that there is a high degree of sensitivity over how physicianspecific resource information is presented to individuals, departments, and the medical staff generally. One hospital representative indicated that the institution holds an annual "economic grand rounds" session for its medical staff, and more frequent economic discussions for residents, focusing on the most cost effective ways to deliver care.296 One respondent indicated that the medical staff in his institution is considering targeting new areas for review such as drug and blood utilization, which have clear economic implications. A medical director interviewee cautioned that any evaluation of physician resource allocation must be closely linked to consideration of severity of illness factors. But interestingly enough, a fellow medical director from a large proprietary hospital indicated that major variations in severity of illness within clinical departments were unusual. D. Economic Factors in Credentialing Central to the study were a series of questions designed to isolate specific economic factors in credentialing and study which hospitals are currently using credentialing, or considering adding to this process. One question probed whether the hospital considered the following areas in credentialing: malpractice risk exposure; numbers of hospital admissions; outpatient services utilization; physician DRG profiles; and, market need for a particular physician and resource allocation. By and large, the elements noted are more relevant in the reappointment process, but if initial applicants have a history in these areas, these factors may be considered at the appointment stage. The majority of hospitals surveyed responded that in credentialing, they review applicants' and staff members' malpractice history as well as the nature of their insurance coverage. Two of the hospital respondents believed that malpractice was, at best, a minor issue because they have experienced so few suits. Another respondent from a large hospital group believed that 90% of the hospitals in his region are looking very carefully at malpractice issues in credentialing to the point where such evaluation can be classified as routine. One respondent indicated that although malpractice risk exposure is considered, the institution had not been able to set meaningful standards in the area. 296


GRAND ROUNDS 1984 (on file with author).

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



The sample hospitals that evaluate inpatient admission rates do so primarily in reference to determining whether an individual should be on the active or courtesy staff. One hospital respondent indicated that a requisite number of admissions for active staff membership was specified in the medical staff bylaws. While the majority of the hospitals surveyed did consider hospital admission rates in reappointment, it was not clear to what extent his analysis played a determinative role in credentialing. Very few respondents indicated that they focused on outpatient services utilization as a particular factor in credentialing. A medical staff director noted that his institution had an agreement to share physician admission rates and outpatient service utilization data with other area hospitals to obtain a better view of an individual physician's overall practice patterns. Only two of the hospitals surveyed answered that market need was a consideration in reappointment. The majority of the hospitals surveyed had medical staff or departmental development plans. These plans generally assess future medical staff needs based on their respective medical markets. Analysis of the need for a physician of a particular specialty was usually based on staff (departmental) development plans and is a consideration in the initial appointment stage. One institution surveyed indicated that it was contemplating a closed medical staff (or closure of certain departments) because it lacked the facilities to accommodate the numbers of new applicants it was receiving. Most of the sample hospitals indicated that they did not consider resource utilization issues in the reappointment process, but a few mentioned that such information was used for educational purposes. Several respondents noted that analysis of resource utilization factors could trigger further quality review and, as such, ultimately affects credentialing recommendations. For example, a Florida hospital administrator responded that a staff physician had his privileges restricted because quality review demonstrated that he was performing inappropriate procedures only for economic gain. One interviewee mentioned that hospitals might eventually rank physicians, for educational purposes, based on certain utilization indicators. In another institution, the chief executive officer indicated that only in very technology-intensive areas would evaluation of resource utilization be appropriate or productive. Respondents were asked if there were additional economic factors, other than those mentioned in the survey, that they used in evaluating physicians for credentialing purposes.297 Among the factors noted were the physician's payer mix and patient profiles, high cost treatments or use of ancillaries, mortality rates, lab tests, physical versus technological ap-


See Appendix.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



preaches to diagnosis and treatment, and resource utilization specific to Medicare patients. One large teaching hospital representative responded that its medical staff had organized itself into a separate association. The association provided business services, similar to a group practice, and, in turn, it evaluated physician performance from a business perspective. Physician members who are not cost effective contributors to the association may have their contract canceled. The respondent expressed the opinion that such an association of peers, independent of the institution, removes the hospital from the difficult process of economic evaluation, but achieves the same result. Finally, the interviewees were questioned about whether there are specific economic factors that they would like to see incorporated into credentialing, and their general attitudes about adopting economic credentialing. The items mentioned by respondents as being areas they would like incorporated into credentialing included physician PRO data, commercial payer profiles, patient case-mix data, payer-mix information, referral patterns, resource consumption measures, DRG outlier analysis, hospital designated quality assurance flags, a variety of utilization review factors, and a patient severity of illness analysis. E. Study Observations The overall response specific to adopting economic measures in credentialing was relatively favorable. Many hospital representatives expressed concern over the political problems that economic credentialing could create. Frequent comments were voiced that expanded economic physician analysis would be better conducted within quality assurance processes. A hospital executive expressed the view that a purely economic measurement system, removed from quality assurance, would not be compatible with the hospital's mission. One respondent noted that it may be difficult, at times, to impose strict policies based on economic review because of competition for certain types of physicians. On the other hand, a hospital CEO believed that economic credentialing may become an important marketing tool demonstrating that the institution is a cost effective provider. It was suggested by two respondents that payers may want to know more about an institution's economic efficiency and may reward hospitals that have more effective medical staffs. One medical director suggested that, as hospitals and medical staffs enter into more joint ventures, both parties will need to be more aware of individual physician economic issues for the success of such linkages. On the basis of this study, it is difficult to generalize because of the small sample size and the fact that several hospitals were included as a result of their interest or involvement in economic credentialing. There

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



are, however, several conclusions that can be drawn. The responses indicated an awareness of the need to evaluate physicians from an economic standpoint. Numerous anecdotes were provided about informal discussions among physicians and administrators regarding a particular individual's inappropriate medical practice patterns and the negative financial ramifications of such behaviors. Although there were many caveats placed on the idea of economic credentialing, there was general support for such a process. But great uncertainty was voiced about how economic analysis should be factored into credentialing from the standpoint of both process and substance. The interviewees believed that political and legal concerns about economic credentialing need to be carefully addressed and that the board must be cautious about not usurping medical staff functions. But many felt that trustees as fiscal fiduciaries need to become more involved in economic matters generally, and deal with financial considerations in all facets of hospital operations. To establish economic credentialing as a routine hospital process, it was suggested that hospital and medical staff bylaws be amended to include it. Most respondents believed that an economic analysis underlying credentialing must be weighed against issues concerning severity of illness. There was consensus about a need to develop more sophisticated accounting and quality measurement systems to make economic analysis of individual physicians more accurate. Concerns were voiced about the legality of developing and utilizing financial standards that could withstand judicial challenge. And finally, there was expressed a general need to develop workable, alternative models for physician economic analysis, and effectively integrate these models into current hospital operations. On the basis of this small study, it appears that economic credentialing is a future trend that medical staff, administrators, and ultimately boards must confront, and as with all new research topics, it is an idea that is ripe for further analysis. CONCLUSION Current and projected trends in health care delivery are such that it is likely that some type of economic analysis of individual physician practices will become part of hospital medical staff credentialing processes. Indeed, such evaluation is already underway in the managed care arena, and there is a growing national movement to establish physician practice guidelines in areas of quality and practice efficiency. It is difficult to predict how hospitals will integrate economic evaluation into current credentialing practices as a number of known and unknown variables will impact on such a decision.

Downloaded by [Temple University Libraries] at 14:01 16 November 2014



This article reviews the more identifiable legal issues that economic credentialing engenders. Like most legal studies of developing areas, it is difficult to achieve a comprehensive analysis because the area is still very fluid. Any alteration of credentialing practices should focus not only on the issues presented but there also needs to be consideration of the impact changes in medical staff credentialing may have on federal and state regulatory initiatives. Although empirical study of the area demonstrates strong interest in the concept of economic analysis of physician practice, there is clearly a great need for the development of models to which institutions can refer in developing approaches to the area.298 The political issues involved in economic credentialing are ones that must be addressed carefully. Hospital managers will need to balance skillfully the financial needs of the institution with the realities of an autonomous medical staff. Boards, in turn, have responsibilities to become more involved in all aspects of an institution's fiscal oversight, including financial aspects of individual physician practices. Economic credentialing will undoubtedly raise numerous problems as it unfolds in the institutional setting, but its likely development demands further study from the perspectives of all the affected parties. APPENDIX

ECONOMIC CREDENTIALING QUESTIONNAIRE 1. What factors are considered in evaluating a candidate for credentialing? (appointment/reappointment) 2. When would the hospital board actively enter the credentialing process and what physician-specific information would be shared with the board for credentialing purposes? 3. In your credentialing processes do you consider any of the following economic factors? A. malpractice risk exposure. B. number of hospital admissions or utilization rate of outpatient services. C. physician specific DRG profiles. D. market need for a physician's specialty. E. resource utilization. 4. What additional economic variables do you consider in evaluating physician performance? 298

See, e.g., Lewis, Achieving High Value Health Care in the Hospital Setting, in INNOVATIONS IN HEALTH CARE QUALITY MEASUREMENT 87 (P. Sprath ed. 1989).



5. How do you deal with severity of illness issues in credentialing? 6. If you aren't looking at economic factors in credentialing, would you like to, and if so, which factors? 7. What role does quality assurance/utilization review play in credentialing?

Downloaded by [Temple University Libraries] at 14:01 16 November 2014

8. In your quality assurance/utilization review do you evaluate resource allocation issues? 9. For purposes of quality assurance/utilization review, what data systems does your hospital use? 10. Do your current quality assurance/utilization data systems allow you to isolate cases by individual medical staff member? 11. Does your hospital have a cost accounting system in place?

Economic credentialing. A new twist in hospital appraisal processes.

This article was downloaded by: [Temple University Libraries] On: 16 November 2014, At: 14:01 Publisher: Taylor & Francis Informa Ltd Registered in En...
3MB Sizes 0 Downloads 0 Views